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Good thing for Merrill that the Glass-Steagall Act has been repealed. If the credit crisis had happened before 1999, Merrill would simply have to declare bankru

Good thing for Merrill that the Glass-Steagall Act has been repealed. If the credit crisis had happened before 1999, Merrill would simply have to declare bankruptcy if it couldn't find a non-bank buyer. A lot of leftist politicians have been calling to reinstate the restrictions on depository institutions and Investment Banks being owned by the same entity. However, when you restrict the capital flows in an industry you reduce the possibilities for restructuring in times of crisis, thereby making it more likely that some firms will fail. It's no coincidence that the US had some of the most restrictive banking laws in the world in the 1930s and it also had the most bank failures during the depression. This deal shows the advantages of deregulation.

jfarmer 18y ago
It's more complicated that that, of course, since the crisis might have been less likely had Glass-Steagall remained law.
- kingkongrevenge 18y ago
  Japan has no equivalent to glass-steagall and their financial system exploded after a massive property bubble. The laws in Japan actually force more financing functions into single banking entities than makes sense -- the opposite of glass-steagall.
raheemm 18y ago
I would beg to differ - recent bank failures are a result of the free market running amuck on easy credit and dumb investments (home loans without income verifications). The 30s were a lot less regulated and the great depression was a result of a free market moving without any government oversight or interference (Hoover responded to the crash by proposing to let the free market sort itself out, which in turn lead to a vicious run on banks.) There is a fine balance between free-market economics and regulatory oversight. Bubbles will take place regardless of the level of regulation. Too much regulation can make small business life a pain, but regulation and oversight prevent swings and spectacular failures like the ones we are witnessing.
- kingkongrevenge 18y ago
  The 30s were more regulated than today in many ways. It was illegal to own gold. What and how much to farm was ordered by the federal government. Labor laws and interventions were extreme. If you traveled back in time to the 30s to participate in the economy it would seem almost fascist/socialist. This is why the depression lasted so long and got so severe in America. Other countries suffered similar initial setbacks as the US, but recovered far more quickly. It is a ridiculous myth that Hoover was laissez faire. He intervened massively in the economy and FDR merely continued his policies. There's little FDR did in his first year that hadn't been drawn up by Hoover. > regulation and oversight prevent swings The housing crisis is the direct result of a deliberately orchestrated policy to subsidize housing. The root cause of bubbles is monetary policy, anyway, not regulation.
  - baha_man 18y ago
    'It was illegal to own gold.' From http://www.coin-newbies.com/articles/gold_never_illegal.html http://www.coin-newbies.com/articles/gold_never_illegal.html: 'Presidential Executive Order 6102, April 5, 1933, made it illegal to "hoard" gold. The order exempted anyone whose "usual and customary" business required gold. (Dentists and jewelers come to mind. Electronic fabricators would come under this once electronics was invented.) Anyone could own up to $100 in gold coin. In 1933, $100 was two or three months wages for the average worker, about $6000 to $10,000 in today's money.'
- nazgulnarsil 18y ago
  the free market caused banks to take bad loans knowing that they could turn around and sell these loans to fannie mae and freddie mac who were taking all these bad loans because they knew that the government would not allow them to fail? no I stand by the free market, problems pop up when corporations collude with the government. bailouts are socialism for the rich.
- Prrometheus 18y ago
  >recent bank failures are a result of the free market running amuck on easy credit and dumb investments (home loans without income verifications) Easy credit was the deliberate goal of the federal government starting in the early 2000's. There was a very mild recession and the government pulled out all the stops to prevent it from getting worse by subsidizing borrowing to keep interest rates well below free market levels. They killed a fly with a cannon and spawned a giant financial bubble. In the free market, people that lend money have the incentive to make sure it gets paid back. This calculus becomes complicated when the subjective factor of the government's whims for the credit market is added in. As far as "dumb investments" go, loans to homeowners were made in the environment of an unprecedented price bubble that was spawned by the loose monetary policy of the federal government. Many "dumb" mortgages are not dumb to make when the value of the underlying collateral is increasing by 30% every year. I know it is the standard line that we need more regulation, but I don't see how any regulator could have been more inclined to make good decisions in such unprecedented circumstances than the market. In hindsight it is easy to say that the Government should have restricted the supply of mortgages, but this is directly the opposite its goals to increase home ownership. Personally, I wish they would stick to the goal of protecting our rights and property and butt out of everything else. >The 30s were a lot less regulated and the great depression was a result of a free market moving without any government oversight or interference I know this is the standard line, but many government actions worsened the Great Depression in the United States and compounded its misery. The two major monetary events of the Great Depression were directly caused by the government - 1) the contraction of the money supply and 2) massive bank failures. 1) was the policy of our wonderful omniscient technocrats at the Federal Reserve and 2) was the result of unitary branching laws and other laws meant to punish "big banks" and prevent them from forming. Anti-bank populism is nothing new in the United States. I don't have the numbers on me, but I seem to remember that the United States (with many anti-bank laws) had thousands of bank failures while Canada (with few such laws) had like 4. The fact is, "big banks" weather hard times easier, and restricting capital flows in the industry make misery for all when unexpected events happen. On top of that, the government acted to institute a price-floor for labor at a time when prices in general were falling, thereby creating massive unemployment. In an attempt to remedy the deflation caused by monetary restriction, the government burnt food and passed a massive tariff which ended up restricting the supply of consumer goods and food. The general problem was a fall in the price level. In the Free Market, the price of labor would have fallen to match other goods and business as normal would have resumed. However, the government decided restrict the supply of labor and other goods, like food, to increase the prices of these goods. They succeeded in this, but they did not drive up the general price level. Instead, they increased the price of these goods relative to everything else, causing shortages in both (unemployment and food shortage). Then the government instituted more programs to fix the problems it had caused, including massive government hiring programs, subsidies, and a war. Noone suggests to this day that maybe they shouldn't have gotten their grubby little ignorant fingers so deep into the economy in the first place. I am not an expert in the Great Depression, just an interested amateur. Still, it is obvious from a cursory glance at the facts that explaining it as a morality tale on the failure of Free Markets is much too simple, although that is the common interpretation taught to High School students. It hurts me to hear the President who presided over the longest, deepest, and most painful depression in US history credited only with "ending it".
tortilla 18y ago
If these entities want to be rescued like banks, they need to be regulated like banks. We need greater transparency along with smart regulation. Allowing these entities to merge to create bigger entities that in turn become too big to fail is no solution. I'm all for the free market, when it is actually "free." Not some bastardized version where its effect is to transfer profits to private corporations and the risks to tax payers.

jfarmer 18y ago

It's more complicated that that, of course, since the crisis might have been less likely had Glass-Steagall remained law.

kingkongrevenge 18y ago
Japan has no equivalent to glass-steagall and their financial system exploded after a massive property bubble. The laws in Japan actually force more financing functions into single banking entities than makes sense -- the opposite of glass-steagall.

raheemm 18y ago

I would beg to differ - recent bank failures are a result of the free market running amuck on easy credit and dumb investments (home loans without income verifications). The 30s were a lot less regulated and the great depression was a result of a free market moving without any government oversight or interference (Hoover responded to the crash by proposing to let the free market sort itself out, which in turn lead to a vicious run on banks.) There is a fine balance between free-market economics and regulatory oversight. Bubbles will take place regardless of the level of regulation. Too much regulation can make small business life a pain, but regulation and oversight prevent swings and spectacular failures like the ones we are witnessing.

kingkongrevenge 18y ago
The 30s were more regulated than today in many ways. It was illegal to own gold. What and how much to farm was ordered by the federal government. Labor laws and interventions were extreme. If you traveled back in time to the 30s to participate in the economy it would seem almost fascist/socialist. This is why the depression lasted so long and got so severe in America. Other countries suffered similar initial setbacks as the US, but recovered far more quickly. It is a ridiculous myth that Hoover was laissez faire. He intervened massively in the economy and FDR merely continued his policies. There's little FDR did in his first year that hadn't been drawn up by Hoover. > regulation and oversight prevent swings The housing crisis is the direct result of a deliberately orchestrated policy to subsidize housing. The root cause of bubbles is monetary policy, anyway, not regulation.
- baha_man 18y ago
  'It was illegal to own gold.' From http://www.coin-newbies.com/articles/gold_never_illegal.html http://www.coin-newbies.com/articles/gold_never_illegal.html: 'Presidential Executive Order 6102, April 5, 1933, made it illegal to "hoard" gold. The order exempted anyone whose "usual and customary" business required gold. (Dentists and jewelers come to mind. Electronic fabricators would come under this once electronics was invented.) Anyone could own up to $100 in gold coin. In 1933, $100 was two or three months wages for the average worker, about $6000 to $10,000 in today's money.'
nazgulnarsil 18y ago
the free market caused banks to take bad loans knowing that they could turn around and sell these loans to fannie mae and freddie mac who were taking all these bad loans because they knew that the government would not allow them to fail? no I stand by the free market, problems pop up when corporations collude with the government. bailouts are socialism for the rich.
Prrometheus 18y ago
>recent bank failures are a result of the free market running amuck on easy credit and dumb investments (home loans without income verifications) Easy credit was the deliberate goal of the federal government starting in the early 2000's. There was a very mild recession and the government pulled out all the stops to prevent it from getting worse by subsidizing borrowing to keep interest rates well below free market levels. They killed a fly with a cannon and spawned a giant financial bubble. In the free market, people that lend money have the incentive to make sure it gets paid back. This calculus becomes complicated when the subjective factor of the government's whims for the credit market is added in. As far as "dumb investments" go, loans to homeowners were made in the environment of an unprecedented price bubble that was spawned by the loose monetary policy of the federal government. Many "dumb" mortgages are not dumb to make when the value of the underlying collateral is increasing by 30% every year. I know it is the standard line that we need more regulation, but I don't see how any regulator could have been more inclined to make good decisions in such unprecedented circumstances than the market. In hindsight it is easy to say that the Government should have restricted the supply of mortgages, but this is directly the opposite its goals to increase home ownership. Personally, I wish they would stick to the goal of protecting our rights and property and butt out of everything else. >The 30s were a lot less regulated and the great depression was a result of a free market moving without any government oversight or interference I know this is the standard line, but many government actions worsened the Great Depression in the United States and compounded its misery. The two major monetary events of the Great Depression were directly caused by the government - 1) the contraction of the money supply and 2) massive bank failures. 1) was the policy of our wonderful omniscient technocrats at the Federal Reserve and 2) was the result of unitary branching laws and other laws meant to punish "big banks" and prevent them from forming. Anti-bank populism is nothing new in the United States. I don't have the numbers on me, but I seem to remember that the United States (with many anti-bank laws) had thousands of bank failures while Canada (with few such laws) had like 4. The fact is, "big banks" weather hard times easier, and restricting capital flows in the industry make misery for all when unexpected events happen. On top of that, the government acted to institute a price-floor for labor at a time when prices in general were falling, thereby creating massive unemployment. In an attempt to remedy the deflation caused by monetary restriction, the government burnt food and passed a massive tariff which ended up restricting the supply of consumer goods and food. The general problem was a fall in the price level. In the Free Market, the price of labor would have fallen to match other goods and business as normal would have resumed. However, the government decided restrict the supply of labor and other goods, like food, to increase the prices of these goods. They succeeded in this, but they did not drive up the general price level. Instead, they increased the price of these goods relative to everything else, causing shortages in both (unemployment and food shortage). Then the government instituted more programs to fix the problems it had caused, including massive government hiring programs, subsidies, and a war. Noone suggests to this day that maybe they shouldn't have gotten their grubby little ignorant fingers so deep into the economy in the first place. I am not an expert in the Great Depression, just an interested amateur. Still, it is obvious from a cursory glance at the facts that explaining it as a morality tale on the failure of Free Markets is much too simple, although that is the common interpretation taught to High School students. It hurts me to hear the President who presided over the longest, deepest, and most painful depression in US history credited only with "ending it".

tortilla 18y ago

If these entities want to be rescued like banks, they need to be regulated like banks. We need greater transparency along with smart regulation. Allowing these entities to merge to create bigger entities that in turn become too big to fail is no solution. I'm all for the free market, when it is actually "free." Not some bastardized version where its effect is to transfer profits to private corporations and the risks to tax payers.