1999 Repeal of Glass-Steagall was the worst deregulation enacted in US history
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The fed hasn't failed us because they're bad people, they've failed us because the people operating our government, although typically good people, are human and have been given the stash and the systemic temptation they face is overwhelming.
It's hard to imagine an end to asset price inflation is in sight.
OP here [1], I posted it with the hope of see the ensuing discussion. I sometimes post things I don't exactly endorse. The point is leveraging HN users' brains to educate myself and hopefully everyone else. This is a topic that needs discussion.
Maybe this is along the lines of the joke "The best way to get the correct answer to a tech question is to post an incorrect answer in an online forum."
> Too bad this isn't.
Yes probably, could you point me to a better argument against the repeal?
[1] I posted the reddit comment here, not OP of reddit post
Citicorp and Travelers group merged in 1998, officially violating Glass-Steagall. Robert Rubin, former chairman of Goldman Sachs, was Treasury Secretary at the time. Once the repeal was passed 1999, he resigned from treasury and joined Citi the same fuckin year as a consultant and director. Between 1999 and 2009, he made ~$120 million.
For more on the influence and corruption of the financial services industry see Inside Job. [1]
G-S was pretty simple in scope: commercial banks could not be investment banks. Commercial banks are stable and boring and have low but predictable profits. Investment banks are either stable and small with low profits or wildly exciting with high variability, and the stable ones get purchased by the exciting ones in boom years.
Decline of the Glass-Steagall Act: https://en.wikipedia.org/wiki/Decline_of_the_Glass%E2%80%93S...
Dot-com bubble: https://en.wikipedia.org/wiki/Dot-com_bubble
In short: Glass-Steagall was about separating commercial banks from investment banks. Of course, in 2008, pure investment banks largely failed. In any case, banks already naturally separated from diseconomies of scope[1].
The reality is that the G-S repeal was a completely harmless symptom of a more harmful disease: general banking deregulation (and a push against new regulations) in the late 1990s and early 2000s (yes, it was bipartisan in both Clinton and Bush years).
[1] https://www.minneapolisfed.org/article/2010/scale-economies-...
I’m certainly not claiming that the repeal was the worst thing ever but, as you mentioned, the overall trend of banking deregulation was bad. Rubin went on to earn hundreds of millions at Citibank and the Clintons earned millions giving 30 minute speeches at GS, Citibank and elsewhere on Wall Street. It certainly gives people like me the belief of a quid pro quo for policies enacted during Clinton’s Presidency. This is similar in appearance to Regan earning millions after his Presidency for speeches in Japan (he deregulated Japanese auto sales).
> It certainly gives people like me the belief of a quid pro quo for policies enacted during Clinton’s Presidency.
This statement made me think quite hard. Why do I not really believe in quid pro quo's (especially like this)? I didn't come up with any particularly good answers, but it would seem to be related to my own childhood and probably the rest of my life, that seems remarkably free of any such arrangements. I've seen them written about, portrayed on TV and in movies, but never in a way that convinced me that they were real (or common, or something). Now, there's every chance that I'm just simply wrong about this, and quid pro quos really are how the world works. It just doesn't seem that way to me.
But then I thought, why not turn the question around.
What do you think makes you believe that quid pro quo's like this are actually a thing?
Tom Delay and K Street are proof enough of high level corruption and paybacks for enacting certain policies. Obama wouldn’t have ever afforded a $5 million house in D.C. until he became President. I might be overly cynical though.
https://money.cnn.com/2016/04/20/news/economy/hillary-clinto...
Quid pro quos[0] are how the world works; you may not have been exposed to it. If you want a detailed discussion of corruption, the book Game of Mates[1] documents corrupt dealing in Australia. If you want a domestic example, look at Illinois politics.
[0] https://en.wikipedia.org/wiki/2019_college_admissions_briber...
Ending the gold standard is responsible for the ever-widening wealth gap (necessary assets like houses get financialized into investment tokens), the constant nonsensical bubbles (stonk market goes up during a pandemic? yeah, that makes sense), the utter misallocation of resources to moonshot ventures (let's fill the sidewalks and rivers with a bunch of e-scooters), and the ongoing full time churn-work culture in spite of technological advancement.
Monetarily unconstrained, the government creates new money to paper over whatever short term pain of the moment. They then explain it away with nonsensical price inflation metrics that, among other things, complete ignore that prices should have been going down drastically due to technological progress, offshoring, etc. And to be clear for all the republicans reading along and nodding - while what I'm saying applies to congress and the executive branch, it applies even moreso to the Fed itself and its continual subsidies to the financial industry. This is done with no debate and no mainstream news coverage (the unilateral decisions are covered in the financial press, presented positively because the audience directly benefits from the subsidies). Then the small portion that might be spent publicly gets mercilessly politicized so the republican party can pretend they're against this state of affairs, with the resulting austerity making the effects of monetary inflation even more cruel for the middle and lower classes.
The skeptic in me questions the motivation of public figures who blame all economic woes on the Fed. It really checks off a lot of populist scapegoat boxes
* Un-elected technocrats making important decisions in the shadows
* big government interfering in the economy
* impossible to understand as a layperson (for anyone?)
* a big departure from traditional ways of doing things so people think it was better in the good old days
Additionally it’s a good way to distract from America’s dismal fiscal policies. Finally, I think there’s a physiological component where people blame economic hardship on the tangible incarnation of wealth - money - as opposed to more abstract systems. It’s a way to map their emotions on something they know and understand.
And other than in the afterglow of victory in WW-II, this continued on, with the additional hazard of yet even more power for government to mismanage the monetary supply.
>The last two recessions were pretty bad but they weren’t due to monetary policy but rather fiscal policy + bad actors and a pandemic.
Monetary policy and fiscal policy have a habit of being intertwined when one of the feds main mechanisms for introducing currency into the public is to buy various bonds and debts that are influenced by fiscal policy. The fact is for most recessions you can't put all the blame in any one box.
Effective at what? By preventing recessions from fully proceeding, the Fed stops the cycle of creative destruction. It's certainly nicer for the employees of moribund businesses who don't get laid off, but according to economic reasoning (as applied everywhere else), they represent a misallocation of labor. At the large scale, bad bets end up being covered by the house rather than the investors who made them losing out.
> The skeptic in me questions the motivation of public figures who blame all economic woes on the Fed
This doesn't have any bearing on the truth of the matter. Given that analyzing the Fed is not a mainstream topic (especially for the blue tribe), the skeptic in you should do more questioning of the official narrative.
> it’s a good way to distract from America’s dismal fiscal policies
It is the US's dismal fiscal policy. Trillions of newly created dollars are handed to the financial industry, but escape political criticism as spending since they're "debt" that technically might have to be paid back (even though they will never be paid back, just like the legislative government's debt). Meanwhile any scrap that might mitigate the inflationary pain for the middle and lower classes gets scrutinized and shot down as a ridiculous handout. Consistency would mean either giving some of the newly printed money to individuals (MMT), or stopping the handouts to the financial industry.
It might also have skuppered the Euro, Gulf War 2 and the adventure in Afganistan.
This is called Post Hoc fallacy: the fallacy that just because one thing happened before another it caused it.
https://en.wikipedia.org/wiki/Post_hoc_ergo_propter_hoc
Maybe repealing Glass Steagull DID cause the 2008 issues. Maybe it didn't. Lots of things happened between those events. Op doesn't bother to check or evidence either way.
You see this a lot in economics/finance especially pop-economics. Something sounds quite convincing until you force yourself to take a breath and consider: is this actually true or does it just suit my conceived notion that more regulation = better?
The act itself is interesting: it established a more segregated form of banking. But it was already undermined a lot by various means (amendments, changes of definitions, interpretations by the FED etc). There is a whole article on the decline of the act and most experts seem to think it either wasn't a factor or was but keeping it wouldn't have averted the crash:
https://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_legisla...
https://en.wikipedia.org/wiki/Decline_of_the_Glass%E2%80%93S...
This may not refute the hypothesis completely, but it’s evidence pointing in the opposite direction.
We could segregate this sort of "retail" finance. Then it wouldn't really be affected by markets booming and busting. But it would be more expensive and less available.
Or we can allow cash to flow from big institutions to small private borrowers. But then we have to accept that when an institution fails it's either bailed out or there is a credit shortage and small retail borrowers have to do without or pay a lot more for a while.
That's the basic choice here. That's why Glass Steagell was repealed (in the mortgage space anyway). That's why the bailouts were "necessary" (politicians rightly judged people would rather bailout than see their mortgages spike).
In short: Glass-Steagall was about separating commercial banks from investment banks. Of course, in 2008, pure investment banks largely failed. In any case, banks already naturally separated from diseconomies of scope.
The reality is that the G-S repeal was a completely harmless symptom of a more harmful disease: general banking deregulation (and a push against new regulations) in the late 1990s and early 2000s (yes, it was bipartisan in both Clinton and Bush years).