I was just about ready to write off the repeal of Glass-Steagall as one of the instigators of the current mess, based on arguments made and linked to here, when I came across Barry Eichengreen's newest Project Syndicate piece. Now Barry is a great economist, with the rare historical perspective on international capital markets (the paperback version of his Globalizing Capital arrived on my desk just today). He has what I think is a new argument:
In the United States, there were two key decisions. The first, in the 1970’s, deregulated commissions paid to stockbrokers. The second, in the 1990’s, removed the Glass-Steagall Act’s restrictions on mixing commercial and investment banking. In the days of fixed commissions, investment banks could make a comfortable living booking stock trades. Deregulation meant competition and thinner margins. Elimination of Glass-Steagall then allowed commercial banks to encroach on the investment banks’ other traditional preserves.
In response, investment banks branched into new businesses like originating and distributing complex derivative securities. They borrowed money and put it to work to sustain their profitability. This gave rise to the first causes of the crisis: the originate-and-distribute model of securitization and the extensive use of leverage.
So the culprit, according to Barry, was too much competition in financial markets, which led to excessive risk-taking and leverage. (The second set of culprits Barry discusses relates to global current-account imbalances.)
Barry makes it clear that he thinks the deregulation of the 1970s and 1990s were sensible things at the time, and that they did reduce costs of intermediation. It was, he thinks, a case of unintended consequences.
Which makes Angry Bear even angrier...