Why Not Restore Glass-Steagall?
By Arnold Kling
The fifty years of relative financial calm that followed the Glass-Steagall Act of 1933, the Securities Exchange Act of 1934, and the Banking Act of 1935 strongly suggest that sound public risk management can make a positive difference.
Thanks to James Kwak for the pointer.
If you think that New Deal regulation worked, then why don’t you come out in favor of going back to that regulation? If you don’t favor going back to New Deal regulation, then why are you claiming that it worked?
Moss and others appear to blame the financial crisis on the repeal of Glass-Steagall. Yet most of them do not argue for restoring Glass-Steagall. No one says that restoring the separation between commercial banking and investment banking would prevent future crises. Hardly anyone even suggests that it would be helpful.
People are not specifically arguing that Glass-Steagall was wonderful regulation. Instead, they are waving around Glass-Steagall in order to make a vague, generic claim that regulation works and deregulation fails.
Beyond this generic “regulation good, deregulation bad” mantra, there is very little that these people have to say that specifically backs up their own regulatory proposals. In contrast, I say that housing policy, securitization, and regulatory capital arbitrage were at the heart of the crisis. I propose changing housing policy to stop trying to use cheap, lenient mortgage credit to promote affordable housing. I propose disconnecting the feeding tube of government support from the mortgage securities market. And I propose attempting to make failure of financial institutions a viable, credible option for regulators. There is a connection between my proposals and what I see as the causes of the crisis.
Moss mostly offers a thermostat theory of financial regulation. Financial regulation is a thermostat, which you can set on “more” or “less.” As long as you turn it toward “more,” everything will be fine. Never mind what actually caused the crisis (regulatory capital arbitrage) and what was actually irrelevant to the crisis (the erosion of competitive boundaries between commercial and investment banking). Just adjust the regulatory thermostat to “more.”