of Glass-Steagall Irrelevant to Financial Crisis
by Thomas E. Woods, Jr.
by Thomas E. Woods, Jr.: Truth
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financial crisis, specific cases of repealed legislation that would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.
to write more on this when I have time (for now, Ill 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.
with those who point to Glass-Steagall is not that theyre
radical. Its that theyre 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.)
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.)
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 cant have it both ways Canada did not have a Glass-Steagall
law! (For the real story on what happened in Canada, click
For a little
more on this, see Bill
Woolsey. Again, Ill try to revisit this soon.
with permission from TomWoods.com.
E. Woods, Jr. [send him
his website], a senior fellow of the Ludwig von Mises
Institute, is the author of eleven books, most recently Rollback:
Repealing Big Government Before the Coming Fiscal Collapse and
How to Resist Federal Tyranny in the 21st Century, as well
as the New York Times bestsellers Meltdown:
A Free-Market Look at Why the Stock Market Collapsed, the Economy
Tanked, and Government Bailouts Will Make Things Worse and
Politically Incorrect Guide to American History. He is
also the editor of five other books, including the just-released
on the Road to Serfdom.
© 2011 Thomas
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