The repeal of Glass Steagall itself did not cause the financial crisis. However, the repeal did help make the crisis worse.
I bring this up because there has been a series of straw man articles claiming Glass Steagall was not a cause in the crisis. This misstates the impact and the broader context. The overturning of the successful 1933 legislation was part and parcel of an ideology that WAS a major factor in the crash: The erroneous belief system that banks can self-regulate. This manifested in a variety of bad ideas, poor oversight and worse legislation.
The finacialization of the American economy allowed banks to become bigger, more complex, and greatly leveraged. When it all came down, the crisis was broader, deeper and more dangerous than it would have been otherwise.
Glass Steagall’s repeal, after 25 years and $300 million worth of lobbying efforts, culminated decades of radical deregulation.
Glass-Steagall, passed during the Depression, kept investment banks (those who worked financial wonders on Wall Street) separate from commercial banks (those which kept our money and loaned it out). One side based on large risks and large rewards. The other based on conservative use of the people’s money.
The connection between investment and commercial banks had been part of the reason for the Crash in 1929 and the run on banks seen in the years following. Glass-Steagall helped reinforce the idea that an American’s money was safe if they put it in a commercial bank. Because that money could not be used for speculation on Wall Street.
From the 80s on, these restrictions were gradually loosened. It is like politicians thought that they did not need to worry about the excesses that investment banks could engender. Following the final repeal of the Glass-Steagall provisions separating what banks could do in 1999, we saw the creation of banks too big to fail whose gross mistakes with our money brought the world’s economies to their knees.
Have we learned anything? Well, not our leaders because we have not reinstated Glass-Steagall. We still see large investment banks playing fast and lose with our money. We still see small commercial banks failing.
Our banks fail while Wall Street banks get bailed out.
It can be argued that the repeal of Glass-Stegall did not cause the current crisis. Perhaps. But it certainly exasperated it. It took what might have been a bad recession and made it much, much worse.
The banks would have been smaller, their troubles would have been more easily managed. We would not have needed to deal with a worldwide crisis by making important decisions in a matter of hours, – never a good idea.
Have we learned our lesson? Not our leaders who have done little to stifle the huge appetites for financial banks to play with our money. The share of our country’s GDP due to financial services was the highest it had ever been leading up to 2008. Even after this debacle. it still remains at historically nose-bleed levels.
And it is even worse if we look at profits from the financial sector:
Several measures indicate that when the financial sector becomes too great a driver of the total market, economic growth is impeded. We continue to have profits from the financial arena at twice what they should be.
And as long as their profits remain high, they will use that money to continue to help themselves and hurt the rest of us.