Carrying Water For The Big Dog

The normally dependable Kevin Drum experiences the spectre of doubt on the cause of the financial meltdown.

In an interview with Peter Baker, Bill Clinton says that although he regrets not regulating derivatives more strictly, he doesn't think that repealing the Glass-Steagall Act and allowing commercial banks to merge with investment banks was a big cause of our financial meltdown:

On the Glass-Steagall, I’ve really thought about that because No. 1, nonbank banking was already a major part of American life at that time. Letting banks take investment positions I don’t think had much to do with this meltdown. And the more diversified institutions in general were better able to handle what happened....I believe if you look at the blurring of the lines which already existed before that bill was signed — the bill arguably gave us a framework, at least, for which this process, which was happening anyway, could be regulated. So I don’t think that’s such a good criticism.

I think actually, if you want to make a criticism on that, it would be an indirect one; you could say that the signing of that legislation sped up what was happening anyway and maybe led some of these institutions to be bigger than they otherwise would have been and the very bigness of some of these groups caused some of this problem because the bigger something is and the newer it is the harder it is to manage.

I think this is roughly right. And frankly, even the "indirect" criticism that repeal of Glass-Steagall produced a glut of banks too big to fail seems a little hard to swallow. After all, even if Citi and Bank of America had remained purely commercial banks they still would have been too big to fail. Hell, Bear Stearns, a modest sized investment bank, was too big to fail. In the event, I doubt very much that Glass-Steagall had much if anything to do with our banking disaster.

My response:



Bullshit, Kevin. GLB most certainly was a major cause of this, and the Big Dog knows damn well it was. The fact of the matter is for all the good Clinton did accomplish, signing GLB into law was arguably his single largest mistake. Yes, banks started to get bigger by 1999. But the regulations watching over these institutions were gutted by GLB. As a result, companies like AIG got so big they would have taken down the entire economy if they had collapsed...and still might.

If the regulations left after GLB were enforced then that would be one thing. But they weren't...and GLB was a big cause of the problem. The difference between merely too big and too big to be allowed to fail, specifically, the difference between banks and banks with such heavy counterparty obligations to insurance companies, investment houses and other banks that their failure would destroy the economy was specifically the moral hazard created by GLB.

Bill Clinton's quietly trying to sweep the fact he signed this law under the rug. He's reponsible for this mess just as surely as Bush and his cronies are, and both Democrats and Republicans in Congress are as well. Pretending otherwise is pointless.