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by Rury 1180 days ago
That's debatable. Glass-Steagall wouldn't have prevented CDOs, but Glass-Steagall's repeal paved way for previously illegal mergers and acquisitions between commercial banks and investment banks. Had these mergers not had been allowed, it is debatable banks would have been "too big to fail", and the entire system wouldn't have been so susceptible to collapse.
1 comments
JumpCrisscross 1179 days ago
> it is debatable banks would have been "too big to fail"

Pre-GLB’s LTCM is a potent counterfactual to this claim. Truth is, the topology of our banking system changed with computerisation. This enables tremendous opportunity. But it introduced novel fragility.

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Rury 1179 days ago
Not really. It's debatable the Fed's intervention was even necessary and the concerns they had about the effects of LTCM’s failure on global financial markets were mislead and greatly exaggerated. Buffet's offer alone could of settled the situation, and demonstrates that the Fed likely didn't need to intervene at all. Ergo, the global market relative to LTCM was probably big enough to absorb the financial shock.

The problem is akin to a boat. If you breach the hull which is one big container, the entire ship will surely sink. If you breach the hull of a ship which has many interior separate containers, only one container fills with water, and the ship continues afloat. The bigger banks and firms get relative to the market, the more susceptible the system is to a complete collapse, as they essentially become the market. There is simply no denying that Glass-Steagall prevented mergers of commercial and investment banks, and no denying that removing it made the system less robust in this very aspect. It's the same reason diversification reduces risk.

Does that mean that the system can't fail when there are no big players? No, absolutely not. But to say Glass-Steagall wasn't proximate to the 2008 crisis is highly dubious.

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JumpCrisscross 1179 days ago
> debatable the Fed's intervention was even necessary and the concerns they had about the effects of LTCM’s failure on global financial markets were mislead and greatly exaggerated

As much as the Fed's involvement in 2008. If your claim is GS-GLB financial history was sanguine, I've got a bridge to sell you.

Pointedly: if you want to tank a financial regulation bill, bring up Glass-Steagall.

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