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McCain-Cantwell: it is a dream I have; well, not exactly

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December 28, 2009 – Comments (1)

Yes, these 2 senators have proposed to bring back Glass-Steagall. (pause for cheers and huzzahs). I hope they succeed: it will solve, at least in part, the too-big-to-fail syndrome. BAC will have to cough-up MER, JPM will have to disgorge BSC, and C will have to give up all of Smith-Barney. Ironically, these financial institutions are bigger and more dangerous than before the meltdown. Yes, they fight tooth and nail to prevent this, since investment banking throws off many more $B's in profits than regular commercial banking.

Problem: I don't think that Glass-Steagall would have prevented the financial crisis. GS, MS, MER, LEH, and BSC were still traditional investment banks: they did not engage in regular, retail commercial banking. Nor would this have done anything about MBS' that are worth less than when they were created/traded, that they bought and leveraged off of.

Unless we limit the leverage of these places, kill FNM and FRE, and let mortgages be done the old fashion way, the financial system is still vulnerable to kind of disaster we had fall of '08.

 

1 Comments – Post Your Own

#1) On December 29, 2009 at 8:45 AM, russiangambit (29.30) wrote:

I find it intresting that while Glass-Steagall wouldn't have prevented the crisis on its own, it is a necessary component of keeping the financial system stable. Another was  - leverage. Both were repealed.

But to see how much opponents Glass-Steagall has now is pretty amazing. And the arguament is thjat it wouldn't have prevented the crisis. Correct, because it is not enough. It is just a part of the solution.

When just a part of the solution is opposed to such degree, it is pretty scary. To see it pass is to see the banking lobby defeated just once. I think I support it just for that.

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