For those who think the repeal of Glass-Steagall caused the financial crisis!
There were two parts of Glass-Steagall that were meant to work together.
1- The government guarantees bank deposits up to 250,000 dollars
2- the government separates banks into different groups to stop them from taking excessive risk.
The infamous "repeal" of Glass-Steagall only repealed the second item. If the government had simply repealed the entire Glass-Steagall, or better yet never even passed it to begin with, we would have been fine. But you cannot have one without the other! These acts were meant to counter balance each other.
But you're wondering, what kind of problems were caused by repealing only the 2nd part of the act, but keeping the first?
First of all, since bank deposits were backed up by the government, the banks had NO REASON to be safe with your deposits. Just think about it, the bank has 200GRAND in the vault. It can put that entire 200GRAND in the stock market. If the stock goes up, the bank gets PAID! If the stock goes down? The government subsidizes the losses. It's a win win for the banks! Of course they're going to take huge gambles with peoples money.
But banks weren't the only one whose behavior was affected by this regulation. The customers, you, me, the regular guy on the street.. ceased caring about how safe
banks were with our money. Think about it, when's the last time you read a consumer report on your bank? When's the last time anyone researched which banks were safest with peoples money? NEVER! We all do plenty of research when we buy a Plasma TV, but we don't even care to read one sentence about the banks we trust with our money! Why? Because we know the government is backing up our deposits! So because of this government deposit insurance, the market, aka US, you and me, the consumers, do not check the banks. We do not care what they do. This gives the banks carte-blanche to act reckless, all because of just one simple regulation. This is what we pro-capitalism people mean when we say that government regulation DISTORTS the market.
And furthermore, the circumstances surrounding the housing collapse in 2008 really had nothing to do with what Glass-Steagall was supposed to regulate. From the Washington Post, not exactly a crazy libertarian source:
Facts such as that Bear Stearns, Lehman Brothers and Merrill Lynch — three institutions at the heart of the crisis — were pure investment banks that had never crossed the old line into commercial banking. The same goes for Goldman Sachs, another favorite villain of the left.
The infamous AIG? An insurance firm. New Century Financial? A real estate investment trust. No Glass-Steagall there.
Two of the biggest banks that went under, Wachovia and Washington Mutual, got into trouble the old-fashioned way – largely by making risky loans to homeowners. Bank of America nearly met the same fate, not because it had bought an investment bank but because it had bought Countrywide Financial, a vanilla-variety mortgage lender.
Meanwhile, J.P. Morgan and Wells Fargo — two large banks with big investment banking arms — resisted taking government capital and arguably could have weathered the crisis without it.
The partial repeal of glass-steagall legitimately had something to do with the crisis, but not because it was repealed.. because it was only PARTIALLY repealed. And even with that said, it really had very little to do with the crisis. The overwhelming bulk of blame for the housing boom and subsequent crash rests on the Federal Reserve, coupled with government guarantees provided to the banks.