I get so very weary of Andrew Ross Sorkin. He is just smart enough to confuse most people. But his last article, Reinstating an Old Rule Is Not a Cure for Crisis, in the NY Times has just gone over the line.Andrew Sorkin says that Glass-Steagall would not have prevented the meltdown in the housing crisis, because the banks that melted down were not commercial banks. They were investment banks not subject to Glass-Steagall rules. But what Sorkin left out of the article was that the credit default swaps were deregulated at the same time through the Commodity Futures Modernization Act. Phil Gramm had a hand in repealing Glass-Steagall. His wife, Wendy, had a major role in taking off the gambling stigma from CDSs.
The two went together. The swaps allowed the banks to hedge against risk whether they were commercial or investment banks. And the investment banks did not have access to this CDS insurance, in such a reckless manner, prior to the assault by the Gramms. One couple deregulated the entire financial industry on the model of the UK Square Mile. After the self certified lending that was the first manifestation of liar loans, in the UK, the financial system used the Gramms to bring liar loans and toxic destruction of main street to the US shores.
The housing bubble was not an accident. It was premeditated.
Sorkin argues about the back end of the crisis, but the crisis could have been minimized with Glass-Steagall and regulation of CDSs in place. Sorkin needs to look into this a lot more before he makes these errors. I wish I could read his mind to see why he committed these mistakes. I hope it wasn’t on purpose!
You must understand that the repeal of Glass-Steagall was called the Financial Services Modernization Act and the deregulation of Swaps was called the Commodity Futures Modernization Act. You can see how closely they were tied together by the titles used!
Safety, which came through Glass-Steagall and the Commodity Exchange Act of 1936 stopped the gambling and would have stopped the housing bubble which was applied in force in late 2003. A new Glass-Steagall could be strengthened by forbidding all banks to use reckless Swaps. They should be severely regulated and there should be criminal penalties on the part of banks and investment banks who use them to potentially undermine the financial system.
In the future, it would not hurt to also forbid unlimited rehypothecation of collateral which is allowed across the pond in the City of London (the Square Mile). It would not hurt to ban securitization based upon bogus risk management or government guarantees of all crap loans. This would be a comprehensive program to stop future housing bubbles in their tracks.
It won’t happen. They won’t be stopped. From austerity the Republicans want housing bubbles, with or without Fannie and Freddie. I go into that in my EBook, Dirty Dirty Republicans.
Sorkin is a schmoozer, and has schmoozed with the likes of Jamie Dimon and many of the big boys. You would have thought he would have learned something in all that schmoozing. But apparently he has not learned enough. Or maybe he has learned too much. If you chip away at the comprehensive puzzle needed to rein in the banks and investment banks, piece by piece, pretty soon you have no way to stop the bankers!
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