American Proscenium

Crisis and Denial

At CPAC (the Conservative Political Action Conference), U.S. Rep. Allen West (R-FL) cited the 1999 repeal of the Glass-Steagall Act as the cause of the financial crisis.  He has a point: As long as Glass-Steagall was in place, we had no systemic collapse.

Banks that were busy underwriting crazy subprime securities—synthetic CDOs, synthetic CDOs squared, etc. (what we call toxic assets)—were at the heart of the crisis.  The Glass-Steagall Act of 1933, Congress’s response to the stock bubble of the 1920’s, provided that no bank “shall underwrite any issue of securities or stock.”  The idea of Glass-Steagall was simple: We need a safe place for ordinary people to deposit their money without having to worry about the risk proclivities of the bank.  The bank is limited to secured loans—and it is buttressed by deposit insurance and an implicit government guarantee.  Investment banks can serve those who want the risk and greater profit.  But those activities are on their own: They are not entitled to any public support—much less a $3.3 trillion bailout.

Peter Wallison, a Republican member of the Financial Crisis Inquiry Commission, disagrees: The repeal of Glass-Steagall played “no role” in the crisis.  The problem, he says, was government interference in the private-housing market.  Mr. Wallison believes that government policy to increase home...

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