DealBook had a piece criticizing Elizabeth Warren and arguing against the "myth of Glass Steagall."
Warren apparently sent an email to supporters calling for the reinstatement of Glass Steagall. The article quoted Warren as arguing that the law “stopped investment banks from gambling away people’s life savings for decades — until Wall Street successfully lobbied to have it repealed in 1999.”
The quote on its face is hard to criticize. Prior to the repeal of Glass Steagall, investment banks could gamble in the stock markets all they wanted. They would not lose deposits since they lacked the authority to accept deposits. They were mostly gambling with shareholder equity and borrowed funds.
Commercial banks, on the other hand, accepted deposits but, for the most part, had to stay out of the equity markets. This effectively reduced the risk profile of commercial banks. For a piece on the adverse consequences of repealing Glass Steagall, see The "Great Fall": The Consequences of Repealing the Glass-Steagall Act.
But somehow the article in DealBook morphed into an allegation that some arguing that repeal of Glass Steagall caused the financial crisis of 2008. This argument was labeled "pure historical revisionism." The article went on to "demolish" the "myth" that Glass Steagall caused the financial crisis.
The only myth, however, that needed demolishing was that there is any significant body of opinion arguing that the repeal of Glass Steagall singularly caused the financial crisis. A crisis as serious and deep as the one that began in 2008 could only have multiple causes and explanations, with these causes and explanations remaining hotly contested.
Indeed, the article itself quoted no one who said that the crisis could be traced exclusively to the repeal of Glass Steagall. Indeed, Warren herself, when asked about the topic, indicated that she did not believe the repeal caused the financial crisis. Instead, she noted that:
- the repeal of the law “had a powerful impact to let the big get bigger.” She also contended that its repeal, brought about by the Gramm-Leach-Bliley Act, “mattered enormously. It is like holding up a sign to regulators to back up.”
In other words, the repeal contributed to the financial crisis in part by allowing the commercial banks to grow in size and by encouraging regulators to take a less active stance in policing the markets. Both are likely true.
Having set up and dispatched a proverbial straw man, the article switched tact. It used the conclusion that Glass Steagall did not singularly cause the finanial crisis to then argue that reinstatement was not the "ultimate solution" and any argument to the contrary should be met with skepticism.
But of course it is a non sequitur to conclude that the non-causality of Glass Steagall ineluctably leads to the conclusion that it ought not to be reinstated. The argument for reinstatement of Glass Steagall is not premised on the view that it was the singular cause of the financial crisis. It is premised on the view that a division of functions would reduce risk, reduce size of the entities (and potentially reduce them to a size that could be allowed to fail), and facilitate regulatory oversight. I would add that it would allow for a class of investment banking firms that were independent of commercial banks and were more dedicated to promoting active capital markets (a topic described in the article cited above).
On this issue, Warren had the better of the analysis.