ABOUT TOM WOODS

Thomas E. Woods, Jr., is the New York Times bestselling author of 11 books, including The Politically Incorrect Guide to American History and Meltdown (on the financial crisis). A senior fellow of the Ludwig von Mises Institute, Woods has appeared on MSNBC, CNBC, FOX News, FOX Business, C-SPAN, Bloomberg Television, and hundreds of radio programs... (Read More)



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‘Repeal’ of Glass-Steagall Irrelevant to Financial Crisis

1st November 2011      by: Tom Woods     

Although we’ve heard a great deal about how “deregulation” caused the financial crisis, specific cases of repealed legislation that would have prevented it are few and far between.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.

I’ll try to write more on this when I have time (for now, I’ll 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 they’re radical. It’s that they’re 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 can’t 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, I’ll try to revisit this soon.

Unlearn the Propaganda!

  • Kmart2

    More surprising tidbits from Socialist Canada: As an American expiate ( I married a Canadian) and have been living here for 21 years. When I visit my left wing democratic family, they ask me why are Solcialist Canadian children better educated compared to the US. Well I just chuckle at the look on their faces when I tell them that Canada doesn’t have a federal department of education!!

  • Jimmyjoejack

    What a load of garbage! Clearly a deregulated banking system is subject to wild fluctuations and crashes as opposed to a regulated one.

  • http://tomwoods.com Tom Woods

    Can I take a wild guess that your version of “deregulated” continues to include a government guarantee of deposits?

    Care to take a stab at the points I made about Canada’s banking stability at a time of great turmoil in the U.S., or are we just going to pretend those points aren’t there?

    Any sense at all that the “wild fluctuations” may have a teensy bit to do with central bank policy, or are we going to pretend central banks, creatures of government, do not exist?

    And for heaven’s sake, the banking sector is the most heavily regulated in the whole economy. Trouble is, the race of supermen we are told inhabit the regulatory agencies told us there was no housing bubble. That’s what happens when you establish a government-sanctioned cartel arrangement of unstable banks and hope a bunch of time-serving “regulators” will keep things running smoothly.

  • iamse7en

    Tom, great points. Tinkering with a failed ponzi scheme by passing more regulation or hiring more regulators isn’t going to prevent the system from going belly-up. However, Ron did vote against the repeal of Glass-Steagall. But, this Reason article explains why (he thought the change would actually bring more regulation, not deregulation, and made taxpayers more liable). So, was this one aspect of “regulation” that Ron liked, because it was better than the alternative? Alex Jones (who also favors the free market) puts blame on the repeal of Glass-Steagall as well. Considering that Ron voted against it, and said this “repeal” (or Gramm-Leach-Briley) would result in something much worse, can we assume it did have some impact on the financial crisis? Obviously the money-printing was the fuel, or central banking is the root cause/cancer, but can we also say that the repeal of Glass-Steagall was bad too?

  • Mike

    Been watching too much television I see.

  • Anonymous

    Like our currently heavily regulated system that never crashes?

  • Ninja

    Tom, you are absolutely brilliant. 

  • http://twitter.com/AnonymousHench Bruno Tata

    Well put.   I have a question.  Eric Janszen at iTulip.com seems to know a lot of economics, but still feels we should have a Federal Reserve, citing the fact that all or nearly all other nations have one.   Is the solution to just vastly reduce its role or to eliminate it entirely?  And if you know his work, what do you think of it?  

  • http://twitter.com/AnonymousHench Bruno Tata

    Read the book “meltdown”, it’ll explain how “regulation” causes more problems than it solves sometimes. 

  • http://twitter.com/344546RADs Free Radical

    repeat

  • http://twitter.com/344546RADs Free Radical

    Oi… So many books to read by so many people. I can’t wait until I can devour all of yours page by page. I hope you won’t be offended when I turn them into a rainbow of highlights. My only concern though is that too many people get put off by your “Im right, you’re wrong” way of telling things how it is, for fear of coming across as “insensitive.” You know your stuff, and I’d kick out anyone on the Economic Council on Foreign Relations in order to replace them with more people like you.

    Given that Halloween just went by I’m surprised there wasn’t more interviews with a zombie, among other monsters and ghouls. 

  • http://twitter.com/344546RADs Free Radical

    As a truck driver, it’s amazing the amounts of regulation involved in this industry. So much so drivers often get caught in situations where they are either going to break the law in one of 3 ways without any way around it.

    1. Stop now in a safe and secure “No Parking Zone” (because a 72′ long truck can’t park just anywhere)

    2. Stop later after our clock runs out and violate the hours of service law by X amount of time to find a safe and legal place to park

    3. Fudge our books and make it look like we are legal so that we can park safely without getting in trouble.

    Some of the regulations are perfectly fine and when created, and revised with sound unbiased non partisan logic, with wiggle room for individual situations, it’s amazing how much such “regulations” can improve things. Unfortunately people who write a law, and those who enforce the law, only believe in the law, not the logic behind it.

  • Mike

    Yeah, really. I just don’t get why people spout that kind of nonsense when the answer is literally in front of their eyes. I just don’t get it.

  • Anonymous

    by repealing the provision of glass-steagall that separated commercial and investment banking, did this not create the too big to fail institutions that were responsible for taking on so much risk?

  • http://tomwoods.com Tom Woods

    No. See the article in the Washington Post the other day on this. That trend long preceded the partial Glass-Steagall repeal.

  • Guest

    The
    problem with repealing Glass Steagall was precisely the fact that it
    was only partially repealed. The issues this created were as follows.
    -Banks
    were allowed to take greater risks with government insured money. In
    other words, your FDIC insured savings account was bet on risky
    derivatives. If the bank lost your money, the FDIC was on the hook for
    it.
    -Banks
    were allowed to form mega banks. My main problem with this is that with
    the larger share of US deposits came more voting shares on the Federal
    reserve board. The end result is 9 internationally owned banks with
    enough voting shares to control Fed Policy.

  • http://www.facebook.com/people/Bill-Scanlon/655504565 Bill Scanlon

    The problem with repealing Glass Steagall was precisely the fact that it
    was only partially repealed. The issues this created were as follows:

    -Banks
    were allowed to take greater risks with government insured money. In
    other words, your FDIC insured savings account was bet on risky
    derivatives. If the bank lost your money, the FDIC was on the hook for
    it.

    -Banks
    were allowed to form mega banks. My main problem with this is that with
    the larger share of US deposits came more voting shares on the Federal
    reserve board. The end result is 9 internationally owned banks with
    enough voting shares to control Fed Policy.



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