Tuesday, November 16, 2010


Well into the depths of the Great Depression, Congress did its best to understand what had precipitated the crisis and what needed to be done to prevent a recurrence. One result was the Glass-Steagall Act of 1933. The main idea was to require the banking industry to reorganize into banks of two types: investment banks that could freely trade, or speculate, in securities and commercial banks which would mostly concentrate on loaning depositor funds to businesses.

If Glass-Steagall had not been repealed in 1999 it would not have prevented the real estate bubble but it would have made it unsustainable sooner, lessening the severity of its collapse. It would also have reduced the spreading of the damage to other sectors of the economy. The result, I estimate, would have been something more like a normal business cycle recession.

I recommend that something very similar to Glass-Steagall be reenacted. The banksters will scream bloody murder and plead that foreign competitors will take over the lucrative derivative based businesses they will be hobbled from doing any longer themselves. My answer is that if other countries want to put their economies at the mercy of institutional speculators taking ruthless advantage of the "too big to fail" moral hazard and inevitable episodes of excessive credit expansion then let that be their problem.

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