Comments on: Was repealing Glass-Steagall the cause for the present Depression? http://www.creditwritedowns.com/2009/02/was-repealing-glass-steagall-the-cause-for-the-present-depression.html a finance news and opinion site Sat, 20 Mar 2010 23:59:54 +0000 hourly 1 By: Econophilehttp://www.creditwritedowns.com/2009/02/was-repealing-glass-steagall-the-cause-for-the-present-depression.html#comment-3478 Econophile Sat, 07 Feb 2009 02:00:23 +0000 http://www.creditwritedowns.com/?p=5696#comment-3478 This is a reasonable conclusion within our existing framework. I do believe that the political process gets in the way of any regulation, and that general incompetence will always be a barrier to stopping financial innovation or thievery (Madoff). I wrote an article on my site on the possibility of a new risk czar back in August, somewhat tongue in cheek. http://dailycapitalist.com/2008/08/25/president-obama-appoints-nobel-laureate-mcfadden-to-head-new-financial-risk-commission/ This is a reasonable conclusion within our existing framework. I do believe that the political process gets in the way of any regulation, and that general incompetence will always be a barrier to stopping financial innovation or thievery (Madoff). I wrote an article on my site on the possibility of a new risk czar back in August, somewhat tongue in cheek. http://dailycapitalist.com/2008/08/25/president-obama-appoints-nobel-laureate-mcfadden-to-head-new-financial-risk-commission/

]]> By: Edward Harrisonhttp://www.creditwritedowns.com/2009/02/was-repealing-glass-steagall-the-cause-for-the-present-depression.html#comment-3457 Edward Harrison Fri, 06 Feb 2009 22:26:40 +0000 http://www.creditwritedowns.com/?p=5696#comment-3457 Tom,I think you hit the nail on the head.<blockquote>I do think that you have to lay down some sort of comprehensive set of guidelines within which financial institutions will operate. There has to be some road map otherwise no one will invest in them. So in that sense the regulators would have to make it pretty clear exactly how the institutions will be allowed to grow and what activities they will be allowed to participate in.</blockquote>A general framework is necessary that lays out fairly concretely when and how regulatory oversight will be used. I would consider this to be 'regulation-light' but oversight-medium versus the likely regulation-heavy and oversight-medium.But we knew this was coming a long time ago. And we also knew that more funds would be used to administer the type of oversight necessary.Econophile, my original arguments, parsed as they are here, are pretty much in line with my general thinking i.e. regulation-light plus oversight-medium is superior to regulation-light and no oversight or regulation-heavy and oversight-medium.The key is to let companies operate their businesses as they see fit within a regime that has well-understood controls and checks. This makes the chance of getting caught greater, and reduces the incentive to cheat the system as Tom Lindmark says. But, again one needs to fund regulators accordingly. Tom,

I think you hit the nail on the head.

I do think that you have to lay down some sort of comprehensive set of guidelines within which financial institutions will operate. There has to be some road map otherwise no one will invest in them. So in that sense the regulators would have to make it pretty clear exactly how the institutions will be allowed to grow and what activities they will be allowed to participate in.

A general framework is necessary that lays out fairly concretely when and how regulatory oversight will be used. I would consider this to be ‘regulation-light’ but oversight-medium versus the likely regulation-heavy and oversight-medium.

But we knew this was coming a long time ago. And we also knew that more funds would be used to administer the type of oversight necessary.

Econophile, my original arguments, parsed as they are here, are pretty much in line with my general thinking i.e. regulation-light plus oversight-medium is superior to regulation-light and no oversight or regulation-heavy and oversight-medium.

The key is to let companies operate their businesses as they see fit within a regime that has well-understood controls and checks. This makes the chance of getting caught greater, and reduces the incentive to cheat the system as Tom Lindmark says. But, again one needs to fund regulators accordingly.

]]> By: Econophilehttp://www.creditwritedowns.com/2009/02/was-repealing-glass-steagall-the-cause-for-the-present-depression.html#comment-3296 Econophile Thu, 05 Feb 2009 22:39:57 +0000 http://www.creditwritedowns.com/?p=5696#comment-3296 Thank you for your clarification, but ... I find your arguments in the original post to sound rather non-free-marketish. I am sure you have been reading some of Rogoff and Reinhart's work on business cycles that point out business cycles are always caused by monetary expansion, which research fits nicely into Austrian theory. I believe they point out the UK as one example of that. I'm not suggesting that anyone adhere blindly to a theory but I guess I'm lost when you say you are a free market advocate. But then, reasonable minds can disagree. Thank you for your clarification, but … I find your arguments in the original post to sound rather non-free-marketish. I am sure you have been reading some of Rogoff and Reinhart’s work on business cycles that point out business cycles are always caused by monetary expansion, which research fits nicely into Austrian theory.
I believe they point out the UK as one example of that. I’m not suggesting that anyone adhere blindly to a theory but I guess I’m lost when you say you are a free market advocate. But then, reasonable minds can disagree.

]]> By: Wag the Doghttp://www.creditwritedowns.com/2009/02/was-repealing-glass-steagall-the-cause-for-the-present-depression.html#comment-3290 Wag the Dog Thu, 05 Feb 2009 21:21:43 +0000 http://www.creditwritedowns.com/?p=5696#comment-3290 I guess one needs to clarify the distinction between oversight, self-regulation (euphemism for no oversight, no regulation), and "light-touch" regulation (Gordon Brown's variant of weakened oversight). Regulation without oversight can be far more pernicious as there is the illusion of fail-safe where none exists. I guess one needs to clarify the distinction between oversight, self-regulation (euphemism for no oversight, no regulation), and “light-touch” regulation (Gordon Brown’s variant of weakened oversight). Regulation without oversight can be far more pernicious as there is the illusion of fail-safe where none exists.

]]> By: Edward Harrisonhttp://www.creditwritedowns.com/2009/02/was-repealing-glass-steagall-the-cause-for-the-present-depression.html#comment-3269 Edward Harrison Thu, 05 Feb 2009 21:11:37 +0000 http://www.creditwritedowns.com/?p=5696#comment-3269 Econophile,I still believe in the free market. In fact, that's why I am arguing 1. Against Glass-Steagall reinstatement and 2. against an over-regulating as a reaction to the Depression.I do believe that no regulation i.e. no oversight is bad. But, deregulation is good. There is no reason for the U.S. to go back to the days of a strictly regulated banking or airline market. However, one must understand that newly deregulated markets almost by definition invite euphoria and irrational exuberance. This needs oversight to prevent the Euphoria from getting out of hand. Remember deregulation and no oversight are not synonymous. There is a role for regulators as the Madoff affair has shown.In the case of the airlines, I think we should have liquidated a number of them long ago. They have been propped up artificially by government action. There is tremendous overcapacity there. So, I am definitely not arguing for the 1970s.In the case of the banks, what was needed was oversight and an enforcement of the rules already on the books, not new regulation like a re-institution of Glass Steagall. But, I fear that this is what we will get.I hope that puts this post in perspective. Econophile,

I still believe in the free market. In fact, that’s why I am arguing 1. Against Glass-Steagall reinstatement and 2. against an over-regulating as a reaction to the Depression.

I do believe that no regulation i.e. no oversight is bad. But, deregulation is good. There is no reason for the U.S. to go back to the days of a strictly regulated banking or airline market. However, one must understand that newly deregulated markets almost by definition invite euphoria and irrational exuberance. This needs oversight to prevent the Euphoria from getting out of hand. Remember deregulation and no oversight are not synonymous. There is a role for regulators as the Madoff affair has shown.

In the case of the airlines, I think we should have liquidated a number of them long ago. They have been propped up artificially by government action. There is tremendous overcapacity there. So, I am definitely not arguing for the 1970s.

In the case of the banks, what was needed was oversight and an enforcement of the rules already on the books, not new regulation like a re-institution of Glass Steagall. But, I fear that this is what we will get.

I hope that puts this post in perspective.

]]> By: Econophilehttp://www.creditwritedowns.com/2009/02/was-repealing-glass-steagall-the-cause-for-the-present-depression.html#comment-3268 Econophile Thu, 05 Feb 2009 21:04:08 +0000 http://www.creditwritedowns.com/?p=5696#comment-3268 Oh my, Edward. You really have slid pretty far down the slippery slope. As a former Austrian, you know what my argument is going to be: "deregulation" as you call it, was not deregulation. The financial market is one of the most regulated of all industries. It's nice to know that you feel that some regulator out there has the wisdom to know what the "right size" of any bank should be. What about the Law of Unintended Consequences which is what we are currently suffering from as the result of regulation, political influence in regulation, and a Fed run amok.One last comment. The airlines? All their bankruptcies? Are you suggesting we should go back to the cartels and high ticket prices? Not very "free market" of you. Oh my, Edward. You really have slid pretty far down the slippery slope. As a former Austrian, you know what my argument is going to be: “deregulation” as you call it, was not deregulation. The financial market is one of the most regulated of all industries. It’s nice to know that you feel that some regulator out there has the wisdom to know what the “right size” of any bank should be. What about the Law of Unintended Consequences which is what we are currently suffering from as the result of regulation, political influence in regulation, and a Fed run amok.

One last comment. The airlines? All their bankruptcies? Are you suggesting we should go back to the cartels and high ticket prices? Not very “free market” of you.

]]> By: maconn (maconn)http://www.creditwritedowns.com/2009/02/was-repealing-glass-steagall-the-cause-for-the-present-depression.html#comment-3226 maconn (maconn) Thu, 05 Feb 2009 01:52:55 +0000 http://www.creditwritedowns.com/?p=5696#comment-3226 Reading: "Was repealing Glass-Steagall the cause for the present Depression? - Credit Writedown" ( http://tinyurl.com/cmfsbc ) Reading: “Was repealing Glass-Steagall the cause for the present Depression? – Credit Writedown” ( http://tinyurl.com/cmfsbc )

]]> By: Tom Lindmarkhttp://www.creditwritedowns.com/2009/02/was-repealing-glass-steagall-the-cause-for-the-present-depression.html#comment-3219 Tom Lindmark Wed, 04 Feb 2009 19:43:28 +0000 http://www.creditwritedowns.com/?p=5696#comment-3219 I would have no problem with the issue of size being attacked through regulation. I do think that you have to lay down some sort of comprehensive set of guidelines within which financial institutions will operate. There has to be some road map otherwise no one will invest in them. So in that sense the regulators would have to make it pretty clear exactly how the institutions will be allowed to grow and what activities they will be allowed to participate in.I agree completely that we don't need much new regulation. Enforcement of existing regulation would have gone a long way towards preventing some of the issues we currently face. I might add that this failure of enforcement occurred at the state level as well as the federal level. A large part of the problem, in my opinion, is under funding the regulatory apparatus at all levels. It's no secret that the odds of getting caught are so small that it's wotrh the risk if the payoff is large enough. I would have no problem with the issue of size being attacked through regulation. I do think that you have to lay down some sort of comprehensive set of guidelines within which financial institutions will operate. There has to be some road map otherwise no one will invest in them. So in that sense the regulators would have to make it pretty clear exactly how the institutions will be allowed to grow and what activities they will be allowed to participate in.

I agree completely that we don’t need much new regulation. Enforcement of existing regulation would have gone a long way towards preventing some of the issues we currently face. I might add that this failure of enforcement occurred at the state level as well as the federal level. A large part of the problem, in my opinion, is under funding the regulatory apparatus at all levels. It’s no secret that the odds of getting caught are so small that it’s wotrh the risk if the payoff is large enough.

]]> By: Edward Harrisonhttp://www.creditwritedowns.com/2009/02/was-repealing-glass-steagall-the-cause-for-the-present-depression.html#comment-3213 Edward Harrison Wed, 04 Feb 2009 17:29:57 +0000 http://www.creditwritedowns.com/?p=5696#comment-3213 Good question, Tom. Here's my take. I would love to hear your response. I would say that bank size is a regulatory issue. There is nothing wrong with the Fed telling a bank that it is too large and needs to cut its asset size. The Federal Reserve and the SEC have many more regulatory powers than they have exercised in the past 10 years. No new regulation is needed. Regulators need to enforce the laws already available. The Madoff case is a perfect example of how the SEC did not enforce the laws already on the books. And the enormous size of JPMorgan Chase and Citigroup is an example of deals that went through which could have been resisted on anti-trust grounds. Good question, Tom. Here’s my take. I would love to hear your response. I would say that bank size is a regulatory issue. There is nothing wrong with the Fed telling a bank that it is too large and needs to cut its asset size. The Federal Reserve and the SEC have many more regulatory powers than they have exercised in the past 10 years. No new regulation is needed. Regulators need to enforce the laws already available. The Madoff case is a perfect example of how the SEC did not enforce the laws already on the books. And the enormous size of JPMorgan Chase and Citigroup is an example of deals that went through which could have been resisted on anti-trust grounds.

]]> By: Tom Lindmarkhttp://www.creditwritedowns.com/2009/02/was-repealing-glass-steagall-the-cause-for-the-present-depression.html#comment-3212 Tom Lindmark Wed, 04 Feb 2009 17:01:37 +0000 http://www.creditwritedowns.com/?p=5696#comment-3212 I agree with almost all of your comments. I agree that Glass-Steagall didn't cause the problem but would ask one question. Did it encourage the growth of overly large banking conglomerates that were unmanageable and by the very nature of their size ensure that if they ran into trouble there was no option except a bailout? The follow-on question, then is should we aim to have smaller financial institutions that are more specialized? I agree with almost all of your comments. I agree that Glass-Steagall didn’t cause the problem but would ask one question. Did it encourage the growth of overly large banking conglomerates that were unmanageable and by the very nature of their size ensure that if they ran into trouble there was no option except a bailout? The follow-on question, then is should we aim to have smaller financial institutions that are more specialized?

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