Barack Obama pounded at one of this season’s silliest themes last night: the idea that deregulation was a big factor in bringing down our financial system. That’s about as true as most things politicians say: which means it’s pretty much the opposite of what happened.
The major piece of deregulatory legislation was the 1999 repeal of the Depression-era Glass Steagall Act that put up a wall of separtation between depositary banks and investment banks. In case you haven’t noticed, the first line of defence of the financial system has been combining our investment banks with strong depositary banks. If we hadn’t repealed Glass Steagall we’d be in much worse shape.
Without Glass-Steagall repeal, JP Morgan Chases wouldn’t have existed, because JP Morgan wouldn’t have merged with Chase. That institution couldn’t have bought Bear Stearns, saving that firm from bankruptcy and allegedly stemming systemic threat to the whole financial system. Bank of America couldn’t buy Merrill Lynch. Goldman Sachs and Morgan Stanley wouldn’t have converted themselve into bank holding companies. In short, we would have been a lot less flexible if we had that old law in place.
It’s too bad that John McCain didn’t call bullshit on Obama’s theme of deregulation. But then again we’re not sure McCain has ever met a market he didn’t want to regulate, so it’s not surprising. Sadly, this bipartisan consensus that it was deregulation, rather than an archaic and entrenched regulatory bureaucracy unable to keep up with financial innovation and the societal push to provide mortgage to anyone who could fog a mirror, that led us into this mess is likely to mean we’ll get the wrong solution to the wrong crisis.
It won’t work but at least politicians and the public will feel we’re doing something. Maybe that will boost investor confidence enough to convince people to lose even more money in the next bubble.