Recently by Thomas E. Woods, Jr.: Truth & Charity
Although weve heard a great deal about how deregulation caused the financial crisis, specific cases of repealed legislation that would have prevented it are few and far between. The one some progressives seem to have settled on is the repeal of the Glass-Steagall Act of 1933, which separated commercial from investment banking. The repeal involved only one provision of the Act, the one preventing the same holding company from controlling both a commercial bank and an investment bank.
Ill try to write more on this when I have time (for now, Ill note that I cover the subject in Rollback, my book from earlier this year). When we recall that stand-alone institutions, both commercial and investment, also failed during the crisis, and that all of them acquired mortgage-backed securities (which they had always been allowed to do, by the way), the Glass-Steagall repeal looks more and more like a red herring that appeals to people whose belief system requires them to find some way a Fed-fueled bubble could have been stopped had the right regulatory structure been in place.
(The problem with those who point to Glass-Steagall is not that theyre radical. Its that theyre not nearly radical enough. They think the system as is, shot through with moral hazard at every level, and presided over by a market-defying central bank, is of its nature stable and without fault; we just need a few regulations.)
Because Glass-Steagall was passed during the Depression, it is assumed that it was addressing a pressing need of the time. In fact, the lack of government-enforced division between commercial and investment banking had precisely zero to do with bank problems during the Great Depression. The 9,000 bank failures during the early 1930s had far more to do with the damage done by government regulation namely, the unit-banking laws that made it difficult for banks to diversify their portfolios (by limiting them to a single office and making branching illegal) than with a lack of regulation. These were small banks, not the behemoths for which Glass-Steagall would have been relevant. Canada had none of these stifling regulations, and had zero bank failures. (Incidentally, Canada also avoided all the post-Civil War bank panics that struck the U.S., even though Canada did not have a central bank until 1934 yet again, reality refuses to conform to the where-would-we-be-without-our-wise-overlords comic-book version of events.)
The Glass-Steagall-did-it crowd is the same crowd that likes to claim Canada avoided the worst of the U.S. crisis because it was so much better regulated. But they cant have it both ways Canada did not have a Glass-Steagall law! (For the real story on what happened in Canada, click here.)
For a little more on this, see Bill Woolsey. Again, Ill try to revisit this soon.
Reprinted with permission from TomWoods.com.
Thomas E. Woods, Jr. [send him mail; visit his website], a senior fellow of the Ludwig von Mises Institute, is the author of eleven books, most recently Rollback: Repealing Big Government Before the Coming Fiscal Collapse and Nullification: How to Resist Federal Tyranny in the 21st Century, as well as the New York Times bestsellers Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse and The Politically Incorrect Guide to American History. He is also the editor of five other books, including the just-released Back on the Road to Serfdom.