Abstract
The banking system in the Western world is stable during the Glass-Steagall period, from 1935 until the beginning of the “great recession”. Until the implementation of the Act, there are periodic banking crises in the US, followed by depressions. After 1935 there is no major banking crisis or depression until 2008. In the late twentieth century, investment bankers are itching to lay their hands on the liquidity in boring commercial banks. They convince the economists and politicians that liberalisation will create benefits for the economy. Economists get convinced despite lacking theoretical ground for such an expectation. Facing consensus of “industry and academy”, politicians then took a deep breath and jump. Later it is easy to blame supervisors for the consequences.
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Notes
- 1.
“It was just that the United States had been spared such bubbles for decades after the Great Depression because of the regulation the government had put in place after that trauma. Once deregulation had taken hold, it was only a matter of time before these horrors of the past would return. The so-called financial innovation had just enabled the bubble to become bigger before it burst…” (Stiglitz, 2010, p. 27).
- 2.
“It (the US) had major banking crises in 1837, 1839, 1867, 1861, 1873, 1884, 1890, 1893, 1896, 1907, 1920, 1930–33, the 1980s, and 2007–09.” (Calomiris & Haber, 2014, p. 5). Comment: The 1980 crisis was a savings and loan crisis. Those institutions were not “banks” but were regulated by special law: the Federal Home Loan Bank Act.
- 3.
“Greenspan joined deregulatory forces with …Robert Rubin, Rubin's deputy Lawrence Summers, and this Third-Wayish trio cheer-led the frenzy of financial innovation now exploding across US trading rooms.
In November 1999 this new breed of American anti-regulators brought down their biggest trophy kill, the repeal of the Glass-Steagall Act…” (Shaxson, 2019, p. 159).
- 4.
The regulatory approach at the turn of the millennium nicely illustrates a quote by William McDonough, President of the New York Federal Reserve: “Every firm does, and on my view should, take a certain amount of calculated risk in allowing new creativity to take place and requiring the internal control apparatus to be a little breathless running behind it” (Engler & Essinger, 2000, p. 200).
- 5.
Estrella (2002).
- 6.
“ …purpose and effect was not to spread risk more effectively by passing it to those better equipped to handle it, but to dump it on those who understand less about it.” (Kay, 2015, p. 73).
- 7.
“None of this is meant to excuse them -in my view, the regulatory failure is inexcusable- but only to explain their astonishing passivity.
Another part of the reason may have been actual or perceived political pressures.” (Blinder, 2013, p. 59).
- 8.
According to FRED data (Sant Luis FED) the total value of real estate loans securitised by financial companies was 53 bn US$ in 1990, 191 bn US$ in 1999, growing to 600 bn US$ in 2008 (FRED, 2019).
- 9.
According to (Estrella, 2002), in 2000 the private sector MBS was about 10% of the total mortgage market.
- 10.
“One [precondition for accepting Basel II advanced approach] was a three-year transition period that capped the amount of capital reduction for any individual bank at 5% per year, though the caps would come off after the third year. Another was permanent 10% cap on the amount of total capital that could decline among all banks using advanced approaches.” (Bair, 2012, p. 33).
- 11.
In the aftermath of the Great Depression, the government addressed the questions, what had caused the depression and how can it prevent a recurrence? The regulatory structure that it adopted served the country and the world well, presiding over an unprecedented period of stability and growth. The Glass-Steagall Act of 1933 was the cornerstone of that regulatory edifice (Stiglitz, 2010, p. 162).
References
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Engler, H., & Essinger, J. (2000). The future of banking. Reuters Limited.
Estrella, A. (2002, May). Securitization and the efficacy of monetary policy. Economic Policy Review, 13.
FRED. (2019). https://fred.stlouisfed.org. Retrieved from (https://fred.stlouisfed.org/series/DTRTNM).
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Odak, D. (2020). Great Recession—The Ugly Daughter of Deregulation. In: A Political Economy of Banking Supervision. Springer, Cham. https://doi.org/10.1007/978-3-030-48547-4_4
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