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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

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.
    - byrneseyeview 17y ago
      Right. I think your claim is that the repeal of Glass-Steagall created agent-principal conflicts: someone could make a loan, and underwrite debt to prop it up. This kind of conflict shows up all the time in business -- a classic example being the CEO who says that the company needs a generous executive compensation plan in order to retain talent, knowing that he'll benefit from it without paying for much of it at all. Since Glass-Steagall restricted just a tiny subset of those conflicts, I'm wondering why you are so focused on it. If agent-principal conflicts need to be placed under government supervision, so be it -- but that's a much bigger issue than just whether a bank needs to own only 0% or 100% of the loans it initiates, and nothing in between.
      - hristov 17y ago
        Glass-Steagall covers the specific case of banks that accept deposits. This is where the average Joe Schmoe sends their paycheck. Yes there are multiple agent principle conflicts associated with securities, but that is ok, because people that invest with securities should be able to know, understand and value the risks. This is not true of the average plumber, electrician or waiter. You cannot expect them to understand the complexities of international finance and all the byzantine securities banks sell and buy just to be able to judge whether an individual bank is safe to deposit your pay check in. Thus, we can either have a system where some regulation exists that ensures that depositor's money is safe or we can say buyer beware, which means that after being burned a couple of times the average person will simply not trust and not use the banking system. This is actually what happened after the crash of 1929 and before Glass Steagall was passed and the FDIC was set up. We know from that period that if ordinary people do not use the banking system, enormous amounts of capital are simply not put to work (i.e., they are stowed away under matresses, etc.) and the economy contracts greatly. So that we have discovered that it is generally beneficial for the government to insure the bank deposits of ordinary people up to a certain amount. This is something that happens in pretty much every modern industrialized nation nowadays. Now it is obvious that if the government is to insure certain banks, it should take steps to make sure that these banks are safe, and that is what the requirements of Glass Steagall are all about. Of course Glass Steagall allows for banks that do not take deposits (i.e., investment banks) to invest in as much securities as they want and to generally to engage in much riskier behaviour.

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.
  - byrneseyeview 17y ago
    Right. I think your claim is that the repeal of Glass-Steagall created agent-principal conflicts: someone could make a loan, and underwrite debt to prop it up. This kind of conflict shows up all the time in business -- a classic example being the CEO who says that the company needs a generous executive compensation plan in order to retain talent, knowing that he'll benefit from it without paying for much of it at all. Since Glass-Steagall restricted just a tiny subset of those conflicts, I'm wondering why you are so focused on it. If agent-principal conflicts need to be placed under government supervision, so be it -- but that's a much bigger issue than just whether a bank needs to own only 0% or 100% of the loans it initiates, and nothing in between.
    - hristov 17y ago
      Glass-Steagall covers the specific case of banks that accept deposits. This is where the average Joe Schmoe sends their paycheck. Yes there are multiple agent principle conflicts associated with securities, but that is ok, because people that invest with securities should be able to know, understand and value the risks. This is not true of the average plumber, electrician or waiter. You cannot expect them to understand the complexities of international finance and all the byzantine securities banks sell and buy just to be able to judge whether an individual bank is safe to deposit your pay check in. Thus, we can either have a system where some regulation exists that ensures that depositor's money is safe or we can say buyer beware, which means that after being burned a couple of times the average person will simply not trust and not use the banking system. This is actually what happened after the crash of 1929 and before Glass Steagall was passed and the FDIC was set up. We know from that period that if ordinary people do not use the banking system, enormous amounts of capital are simply not put to work (i.e., they are stowed away under matresses, etc.) and the economy contracts greatly. So that we have discovered that it is generally beneficial for the government to insure the bank deposits of ordinary people up to a certain amount. This is something that happens in pretty much every modern industrialized nation nowadays. Now it is obvious that if the government is to insure certain banks, it should take steps to make sure that these banks are safe, and that is what the requirements of Glass Steagall are all about. Of course Glass Steagall allows for banks that do not take deposits (i.e., investment banks) to invest in as much securities as they want and to generally to engage in much riskier behaviour.