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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.

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

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.