Friday, September 26, 2008

Bill Clinton is Right about Glass-Steagall

Recently, a lot of Democrats and left-leaning journalists have been blaming the 1999 repeal of the Glass-Steagall Act for today's financial problems. I believe they are wrong. Their reasoning is based on the post hoc ergo propter hoc ("after the fact, therefore because of the fact") fallacy. They reason that since Glass-Steagall was repealed in 1999 and we have a credit crisis today, the repeal of Glass-Steagall caused the credit crisis.

The truth is that there were far more bank failures a decade prior to the the repeal of the Glass-Steagall Act than there are today, even though today's financial crisis is much worse.

Instead, today's financial crisis is due to the decline of a housing bubble. The housing bubble was caused by unreasonably low Fed interest rates, a savings glut overseas, and the get-rich-quick mentality of home buyers.

While many Democrats and journalists are wrong about the repeal of Glass-Steagall, Bill Clinton is right:
One policy Clinton said he doesn't regret is his repeal of the Glass-Steagall Act in 1999, which, for the first time since the Depression, allowed commercial banks to engage in investment banking activities. Clinton said the commercial banks were an important moderating force on the risk-taking of the big investment firms that collapsed this week. "In the case of the current crisis, I believe the bill I signed allowed Bank of America to take over Merrill Lynch," he said.
If Glass-Steagall were still law, a troubled Bear Stearns would not have been allowed to merge with JPMorgan. Also, Goldman Sachs and Morgan Stanley would not have been allowed to become commercial bank holding companies. The repeal of Glass-Steagall has been a savior, not a villain.

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