Repealing Glass-Steagall Did Not Lead to the Financial Crisis

Theories abound about the causes of the Financial Crisis of 2008, and “deregulation” is commonly indicted as one of the main culprits.  With few relevant changes to financial regulation to point to, the so-called “dismantling of Glass-Steagall” is invariably cited as evidence, but the claim doesn’t stand up to scrutiny.  In the words of one commenter:

“Dismantling Glass-Steagall pretty obviously had the side effect of creating a cadre too-big-to-fail behemoths, where the upside went to owners and senior managers and the downside stayed with taxpayers.”

In truth, this is far from obvious. As Teapolicy notes: AIG, Bear Stearns, Lehman, Countrywide Financial, and the Reserve Primary Fund were not touched by any changes to Glass-Steagall and were at the forefront of the crisis.  The crisis simply did not stem from larger institutions made vulnerable specifically because they co-mingled commercial banking and investment banking.

Those who demonize deregulation imply that we somehow wouldn’t have bailed out our financial system if we just hadn’t allowed a few particular mergers in the early 2000’s but allowed every other shenanigan that had gone on for so long. The reality is that tax payers were already on the hook for anything that went wrong prior to any changes to Glass-Steagall and this was a feature of the legislation, not a bug.

The depression era banking laws were designed precisely to put the downside risk on tax payers in exchange for tighter regulation of the industry to supposedly keep the industry in check.  Problems with the “state as countervailing power doctrine” are discussed elsewhere, including the ever present fact that the regulations themselves are often written by very people whose corruption is supposed to be kept in check.

See Also:

Ancapedia: Deregulation Did Not Cause the Financial Crisis – CFMA Edition

Ancapedia: Malregulation is Not Deregulation

Ancapedia: The State is Not a “Countervailing Power”