[guelo]

On the Glass-Steagal reinstatement, even though you did not offer any argument against it except to repeat McCardle's claim that people don't know what they're talking about, I'll offer an argument for it even though I admit I'm not some financial expert.

Glass-Steagall meant that investment banks had to entice investors to put their money into the system. The repeal allowed investment banks to raid and leverage depositors accounts. This introduces systemic risk because depositors unlike investors view their savings as a demand account and receive little interest because of that. Their money is basically cheap for the banks to get and the depositors always expect that money to be there. Investors expect a return that justifies the risk that they are entering into together with the investment bank/brokerage. Their money is relatively expensive to banks to get because the investor knows that money could disappear. Once banks could treat all those deposits as levergable funds for risky investments they didn't have to entice the expensive investment money or use caution in their investments (FDIC will pick up the losses). So with the repeal of G-S, brokerages suddenly had access to huge piles of FDIC insured money and all that money needed some place to go... and we've coincidentally had 2 major bubbles since. First the dotcoms, then mbs's and other related cdo's and now Treasuries. Break up the banks, make the investment houses have to make sensible bets (not 50:1 levers) that return better returns for investors and force banks to make terribly boring investments to return terribly boring rates to depositors and we have the beginnings of the return of sanity in banking. Without that, we will continue to inflate bubbles, pay bonuses and then bailout losses after the unavoidable asset deflation.

Here is another, more informed than me, argument for reinstatement http://moneywatch.bnet.com/economic-news/blog/maximum-utilit... "However, whether the elimination of the Glass-Steagall act caused the present crisis is the wrong question to ask. To determine the value of reinstating a similar rule, the question is whether the elimination of the Glass-Steagall act made the system more vulnerable to crashes. When the question is phrased in this way, it’s clear that it has made the system more vulnerable for the reasons outlined above.

[yummyfajitas]

and we've coincidentally had 2 major bubbles since. First the dotcoms...

Dotcom bubble: 1995-2000.

Gramm-Leach-Bliley: Nov 1999.

Further, if you measure the housing bubble in the usual way (movement in the price/rent ratio), the housing bubble also started in 1998.

http://research.stlouisfed.org/fred2/graph/?g=31w

[rskar]

http://en.wikipedia.org/wiki/Timeline_of_the_United_States_h... indicates United States housing bubble was from 2001-2005. However, it also says that in 1998 the nflation-adjusted home price appreciation exceeded 10%/year in most West Coast metropolitan areas.

[othermaciej]

Thanks for presenting an actual argument. However, I am not persuaded by your argument. First, there is the timing issue noted by the commenter below. Second, in general, speculative bubbles are not driven by retail savings, or the idea that they are some how extra easy money. Speculative bubbles tend to be driven by (a) sustained periods of market irrationality; and (b) low interest rates. Interest rates are driven primarily by the Federal Reserve, not by retail depositors. The housing bubble in particular was inflated in large part by overly liberal granting of unaffordable mortgages on the expectation that housing prices would continue to grow. Issuing mortgages is a classic commercial bank activity, not an investment activity. The contagion to the wider financial system was through repackaging of mortgages into derivatives, something that was largely done by entities with no commercial banking activity, such as Lehman Brothers, Goldman-Sachs, Fannie Mae, and Freddie Mac. Combining commercial and investment banking under one roof was not particularly involved as a driver of the crisis.

I am also not persuaded by your linked argument as an argument for Glass-Steagall. It argue for the Volcker rule, which is not the same thing as any former provision of Glass-Steagall. I am not sure why the author relates the two, other than perhaps the fact that Glass-Steagall is a popular talking point. To be more clear on the difference, the provision of Glass-Steagall that tends to capture the popular imagination, and which was repealed in 1999, was a rule against combining investment banking and commercial banking within the same entity. The Volcker Rule would instead forbid banks from trading for their own account, while still allowing them to combine commercial and investment activity. I don't have enough knowledge of the Volker rule to argue for or against it, but I the sketchy argument made in its favor and the attempt to conflate it with Glass-Steagall are not terribly persuasive.

Finally I don't think there is any onus on me to offer an argument against Glass-Steagall, until someone presents an argument in its favor. Surely the burden of proof should be on those favoring a new regulation. That being said, the major reason the rule was repealed is that it made US banks uncompetitive compared to foreign banks, with no clear sign that the US banking system was more stable than foreign banking systems as a result. There is no particular reason to think this has changed. So reinstating the rule would make US banks less competitive and perhaps drive more financial activities overseas, for no clear gains.