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Glass-Steagall will definitely prevent what happened in the current housing crisis. The bubble happened because banks were lending money for homes but were not

by hristov 17y ago

Glass-Steagall will definitely prevent what happened in the current housing crisis. The bubble happened because banks were lending money for homes but were not keeping the loans. Instead they were packaging the loans as securities and selling the securities to third party investors. Thus, the banks did not need to worry that the loans were good, they just needed to worry the loans looked ok to the rating agencies at the time of sale of the securities. The third party investors had no idea who the borrowers were or how trustworthy they were, they just trusted the rating agencies. And the rating agencies turned out to be either stupid or corrupt or both. This would not have been possible with Glass-Steagall in force. Banks can still make loans but they could not securitize or sell the loans. They had to keep the loans on their books. This means the institutions and even individual people that made the loans would be responsible that they got paid back. Furthermore, all loans that are on the books would be regularly examined by banking examiners from the FDIC. When securitizing the loans, banks mostly avoided examination, on the grounds that they got their money for the loans so it does not matter much whether the loans perform or not. Now it cannot be guaranteed that Glass-Steagall will prevent bubbles in general, but it is certain that what happened last time could not possibly happen with Glass Steagall in effect. Regarding your second statement, I think you are confused about it again. When Glass Steagall was in effect regular commercial banks were rather limited as to the securities they could purchase. I believe they were allowed to make only 10 percent of their income from securities. They had to make most of their money by making loans directly to borrowers, instead of trading securities. That is what the article is referring to.

byrneseyeview 17y ago
Glass-Steagall will definitely prevent what happened in the current housing crisis. The bubble happened because banks were lending money for homes but were not keeping the loans. Instead they were packaging the loans as securities and selling the securities to third party investors. Thus, the banks did not need to worry that the loans were good, they just needed to worry the loans looked ok to the rating agencies at the time of sale of the securities. The third party investors had no idea who the borrowers were or how trustworthy they were, they just trusted the rating agencies. And the rating agencies turned out to be either stupid or corrupt or both. That is how securities markets work. Exactly the same forces affect, say, the CEO who owns .1% of his company's outstanding stock. Not an ideal situation, but not one that should be banned. I believe they were allowed to make only 10 percent of their income from securities. They had to make most of their money by making loans directly to borrowers, instead of trading securities. That is what the article is referring to. You're probably talking about the time before S&L deregulation, when, at one point, savings and loans had an aggregate negative net worth because they could only make long-term loans (mortgages and treasuries) and thus got buried when rates went up. Despite our current problems, I don't believe the US's financial sector has had a negative net worth since then. It should be pretty compelling to you that despite higher leverage, intertwined derivatives, the disastrous market manipulations of Fannie and Freddie, etc., our less regulated system is still less of a disaster than what came before it.
- hristov 17y ago
  "That is how securities markets work. Exactly the same forces affect, say, the CEO who owns .1% of his company's outstanding stock. Not an ideal situation, but not one that should be banned." Ok that's how securities markets work. So what's your point? It is still the case that this would not have happened if Glass Steagall was in effect because it ensured that certain types of banks were simply not exposed to the securities markets. Oh and by the way Glass Steagall does not ban owning securities, it still allows other types of banks (investment banks) to own all the securities they want. "You're probably talking about the time before S&L deregulation ... " No I am not talking about the S&L deregulation, I am talking about the Glass-Steagall act. You know, the thing I said I was talking about. That whole paragraph is a rather confused straw man argument. "The disastrous market manipulations of Fannie and Freddie." Huh? Another straw man argument.
  - byrneseyeview 17y ago
    Ok that's how securities markets work. So what's your point? That there are ways to deal with it? That we've been dealing with it for a couple centuries now? That agent-principal conflicts are well-understood? There are costs and benefits to separating ownership from control. One of the benefits is that talented people can manage established companies; you don't have to be a Goldman or a Sachs to run Goldman Sachs. No I am not talking about the S&L deregulation That portion of the comment was sarcastic. I was making fun of your assumption that a regulatory regime that rendered S&Ls insolvent was somehow superior to one that didn't render the (much more leveraged) investment banks insolvent. "The disastrous market manipulations of Fannie and Freddie." Huh? Another straw man argument. Surely guaranteeing trillions of dollars of tax-subsidized mortgage loans had nothing to do with the real estate bubble! It was those perfidious bankers!
    - hristov 17y ago
      This is all off topic, and does not have much to do with Glass Steagall at all. Glass Steagall did allow separation of ownership and control.
yummyfajitas 17y ago
The bubble happened because banks were lending money for homes but were not keeping the loans....This would not have been possible with Glass-Steagall in force. False. This happened all the time with Glass-Steagall in force. Glass Steagall was repealed in 1999, mortgage backed securities were issued and sold long before then. Many commercial banks traded MBS under Glass-Steagall as a way of reducing their risk; in fact regulatory bodies encouraged them to do this. You are incorrectly conflating many activities, and assuming Glass-Steagall prevents all of them. As for my second statement, I'm mocking the article's silly idea that investing in "productive assets" is somehow different from "financial speculation." I'm not making any claims about what percentage of their assets they would speculate with (either in the form of equities or bonds).
- hristov 17y ago
  "False. This happened all the time with Glass-Steagall in force. Glass Steagall was repealed in 1999, mortgage backed securities were issued and sold long before then. Many commercial banks traded MBS under Glass-Steagall as a way of reducing their risk; in fact regulatory bodies encouraged them to do this." We are really getting into details here. This was technically partially true, because Glass Steagall was being progressively watered down long before it was actually repealed. So commercial banks were allowed to underwrite some securities but again there were limits as to how much they could do. I think the limit started at 5% of revenue and then progressively expanded to 25% as GS was being further watered down. But I doubt banks would have been allowed to create the huge amounts of mortgage backed securities they did after the repeal, even in the most watered down version of GS. Also, when the original article argued for the reinstation of Glass Steagall they probably argued for it in its original non-watered down version. As to your second statement, you said "Instead of speculating in "finance", lending went to speculate in "productive assets" like equities and bonds." To me this means that you misunderstood what the original article was trying to say. By productive assets the original article meant direct loans to businesses and individuals instead of financial instruments.
  - yummyfajitas 17y ago
    Glass-Steagall prevented banks from running a trading desk, not from securitizing and selling their loans. You are simply mistaken as to what the law actually means. By productive assets the original article meant direct loans to businesses and individuals instead of financial instruments. A direct loan to a business is, by definition, speculating on a corporate bond.

by hristov 17y ago

byrneseyeview 17y ago

Glass-Steagall will definitely prevent what happened in the current housing crisis. The bubble happened because banks were lending money for homes but were not keeping the loans. Instead they were packaging the loans as securities and selling the securities to third party investors. Thus, the banks did not need to worry that the loans were good, they just needed to worry the loans looked ok to the rating agencies at the time of sale of the securities. The third party investors had no idea who the borrowers were or how trustworthy they were, they just trusted the rating agencies. And the rating agencies turned out to be either stupid or corrupt or both. That is how securities markets work. Exactly the same forces affect, say, the CEO who owns .1% of his company's outstanding stock. Not an ideal situation, but not one that should be banned. I believe they were allowed to make only 10 percent of their income from securities. They had to make most of their money by making loans directly to borrowers, instead of trading securities. That is what the article is referring to. You're probably talking about the time before S&L deregulation, when, at one point, savings and loans had an aggregate negative net worth because they could only make long-term loans (mortgages and treasuries) and thus got buried when rates went up. Despite our current problems, I don't believe the US's financial sector has had a negative net worth since then. It should be pretty compelling to you that despite higher leverage, intertwined derivatives, the disastrous market manipulations of Fannie and Freddie, etc., our less regulated system is still less of a disaster than what came before it.

hristov 17y ago
"That is how securities markets work. Exactly the same forces affect, say, the CEO who owns .1% of his company's outstanding stock. Not an ideal situation, but not one that should be banned." Ok that's how securities markets work. So what's your point? It is still the case that this would not have happened if Glass Steagall was in effect because it ensured that certain types of banks were simply not exposed to the securities markets. Oh and by the way Glass Steagall does not ban owning securities, it still allows other types of banks (investment banks) to own all the securities they want. "You're probably talking about the time before S&L deregulation ... " No I am not talking about the S&L deregulation, I am talking about the Glass-Steagall act. You know, the thing I said I was talking about. That whole paragraph is a rather confused straw man argument. "The disastrous market manipulations of Fannie and Freddie." Huh? Another straw man argument.
- byrneseyeview 17y ago
  Ok that's how securities markets work. So what's your point? That there are ways to deal with it? That we've been dealing with it for a couple centuries now? That agent-principal conflicts are well-understood? There are costs and benefits to separating ownership from control. One of the benefits is that talented people can manage established companies; you don't have to be a Goldman or a Sachs to run Goldman Sachs. No I am not talking about the S&L deregulation That portion of the comment was sarcastic. I was making fun of your assumption that a regulatory regime that rendered S&Ls insolvent was somehow superior to one that didn't render the (much more leveraged) investment banks insolvent. "The disastrous market manipulations of Fannie and Freddie." Huh? Another straw man argument. Surely guaranteeing trillions of dollars of tax-subsidized mortgage loans had nothing to do with the real estate bubble! It was those perfidious bankers!
  - hristov 17y ago
    This is all off topic, and does not have much to do with Glass Steagall at all. Glass Steagall did allow separation of ownership and control.

yummyfajitas 17y ago

The bubble happened because banks were lending money for homes but were not keeping the loans....This would not have been possible with Glass-Steagall in force. False. This happened all the time with Glass-Steagall in force. Glass Steagall was repealed in 1999, mortgage backed securities were issued and sold long before then. Many commercial banks traded MBS under Glass-Steagall as a way of reducing their risk; in fact regulatory bodies encouraged them to do this. You are incorrectly conflating many activities, and assuming Glass-Steagall prevents all of them. As for my second statement, I'm mocking the article's silly idea that investing in "productive assets" is somehow different from "financial speculation." I'm not making any claims about what percentage of their assets they would speculate with (either in the form of equities or bonds).

hristov 17y ago
"False. This happened all the time with Glass-Steagall in force. Glass Steagall was repealed in 1999, mortgage backed securities were issued and sold long before then. Many commercial banks traded MBS under Glass-Steagall as a way of reducing their risk; in fact regulatory bodies encouraged them to do this." We are really getting into details here. This was technically partially true, because Glass Steagall was being progressively watered down long before it was actually repealed. So commercial banks were allowed to underwrite some securities but again there were limits as to how much they could do. I think the limit started at 5% of revenue and then progressively expanded to 25% as GS was being further watered down. But I doubt banks would have been allowed to create the huge amounts of mortgage backed securities they did after the repeal, even in the most watered down version of GS. Also, when the original article argued for the reinstation of Glass Steagall they probably argued for it in its original non-watered down version. As to your second statement, you said "Instead of speculating in "finance", lending went to speculate in "productive assets" like equities and bonds." To me this means that you misunderstood what the original article was trying to say. By productive assets the original article meant direct loans to businesses and individuals instead of financial instruments.
- yummyfajitas 17y ago
  Glass-Steagall prevented banks from running a trading desk, not from securitizing and selling their loans. You are simply mistaken as to what the law actually means. By productive assets the original article meant direct loans to businesses and individuals instead of financial instruments. A direct loan to a business is, by definition, speculating on a corporate bond.