ED CONE: Bring back Glass-Steagall. Kind of a horse/barn-door thing, but read it.
UPDATE: Dave Price emails:
I know a few other CPAs who shake their heads when the subject is brought up.
Repealing Glass-Steagal may someday be viewed as the most catastrophic mistake of our generation.
Conflict of interest is not why, however. Most everyone has forgotten the primary reason why Glass-Steagal was so important: it separated banks, insurers, and businesses so that a failure in one area could not cascade into a Panic and collapse the entire economy.
After most of a century, people are once again assuming a systemic collapse is impossible, even as they remove the mechanisms that prevented it for so long.
It’s an unnecessary gamble. Pray we never pay the price.
That’s usually how things work. “Who needs these fireproof drapes? — We never have fires!” We see this in all sorts of areas.
ANOTHER UPDATE: Reader John Rippey emails:
You and a bunch of other high-minded thinkers are leaning toward the view that the repeal of the Glass-Steagall Act was a mistake. Your thinking is based on . . . well, gee, I don’t know. The idea is just plain dumb.
The Thursday report of the President’s Working Group on Financial Markets (PWG), available on Treasury’s web site, lists the causes and proposes cures for what has been happening in the financial markets since last summer. Nowhere is it suggested by the regulators that the existence of Glass-Steagall would have ameliorated present market woes, nor does the report suggest that its reenactment would provide relief.
Note that JPMorgan-Chase has been Bear-Stearns banker, in other words JPM-C this month is doing exactly what commercial banks have been doing for decades, i.e., providing short-term credit for investment banks (otherwise known as commercial loans)–an activity always permissible under Glass-Steagall. (Albeit this time, the Fed has stepped in to guarantee the transactions for 28 days.)
If there is a culprit in commercial banking, it is, per usual, lax supervision of national banks (e.g., Citi) by the Comptroller of the Currency (think Franklin National Bank), coupled with counter-productive capital requirements cooked up in Basel.
Are large state member banks experiencing life-threatening problems? No. Significantly, the Comptroller was left off the working group, but the Fed was not. Please, professor, before latching on to platitudes, examine the facts.
Bottom line: I’m wrong. Well, that’s hardly a man-bites-dog event. One of my hedge-fund readers agrees, albeit a bit more politely:
The Bear Stearns crisis du jour is not at all related to the Glass-Steagall separation of commercial from investment banking. Bear has always been an investment bank, and its current fragility is entirely a consequence of bad decisions made in the running of its standard, core businesses.
If one wants to point a finger at regulations for the present mess, look at the green eyeshade boys who decided on mark-to-market asset pricing for items lacking a market, and international capital rules that drive institutions to move stuff off balance sheet while demanding paper be rated AAA whether merited or not.
Stay tuned, as we’ll probably be hearing more about this.