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My point is fairly narrow: People love to blame Glass-Steagall, and yet consider the roll call of shame during the GFC: Northern Rock, Bear Stearns, Countrywide, Fannie Mae, Freddie Mac, Merryl Lynch, AIG, Lehman Brothers, HBOS, Fannie Mae, HBOS, Lloyds TSB. Every one of those is on the list for two reasons: 1) Being very large ("too big to fail"). 2) Having done stupid things which would have been legal under the restrictions of Glass-Steagall. The details of what each did differ, but in every case the stupid actions did not cross a line between retail and investment arms, or retail and insurance arms. I think that, if you review the list, it's screamingly obvious that size matters hugely, and any regulation reasonably expected to stop the "too big to fail" problem should be looked at very favourably. (Note: No such regulation has been passed, or seriously proposed.) And to a lesser degree, there are some good arguments to be made for bringing regulation of the "shadow banking" sector into line with the rest of the industry, extending deposit insurance to money market accounts[1], and possibly for reducing government involvement in the mortgage industry[2]. What's not obvious is why a regulation that banned something none of the entries on that list were doing would have helped. You say that it had a "chilling effect", but I'm sceptical. If it wasn't for Glass-Steagall, AIG wouldn't have decided to bet the farm on house price stability? Can you articulate any mechanism for how this might have occured? (If only Citigroup or Wachovia had failed, there'd be an argument that Glass-Steagall repeal helped create "too big to fail" companies by allowing large specialized firms to merge into behomoth diversified firms - but of course, none of those diversified firms failed. If anything, there's a better argument for how Glass-Steagall repeal helped reduce the damage from the crisis.) [1]: These factors were significantly involved in several of the largest bank failures. [2]: From the point of view of the taxpayer, the most expensive failures all involved mortgages, most of all Fanny Mae. Abolishing the GSEs and walking back the bi-partisan multi-decade obsession with boosting home ownership rates seems sensible to me. Even today, the idea is highly controversial though. |