from Forbes Five Years Of Dodd-Frank: ‘Too Big To Fail’ Still Unresolved by Norbert Michel
The notion that these transactions took place in some shadowy, hidden room of finance, where regulators had no clue what was going on, is absolutely false. Not only did they know, they actually blessed the transactions as safe. Repeatedly.
More broadly, even AIG was regulated. And there was no substantial reduction in financial market regulations in any of the previous 10 decades. Many rules and regulations had been changed over the years, but virtually none were eliminated.
But these two big myths – deregulation and speculation caused the crisis – refuse to die.Perhaps it’s tradition. The practice of blaming speculators for financial turmoil is as old as the hills. Back in the 1600s, the English Parliament blamed a major crisis on the “pernicious Art of Stock-jobbing.” In 1929, members of Congress blamed the stock market crash (and the Great Depression) on speculators. They subsequently used the event to radically alter federal regulations.
One major piece of legislation was the Glass-Steagall Act of 1933. It prevented – for the first time in the U.S. – commercial banks from engaging in many securities-related activities through companies known as securities affiliates.
Sen. Carter Glass argued that these affiliates “made one of the greatest contributions to the unprecedented disaster which has caused this almost incurable depression.”
Even though the evidence suggests combined commercial and investment banking activities did not cause excessive risk taking, much less the Great Depression, this myth persists to this very day.
Senators John McCain (R-Ariz.) and Elizabeth Warren (D-Mass.) have just introduced a new bill to reinstitute Glass-Steagall restrictions on commercial and investment banking affiliates.
Yet there’s not one shred of credible evidence that these affiliations, legally permitted by the 1999 Gramm–Leach–Bliley Act (GLBA), caused the 2008 financial crisis. It’s just as much a myth now as it was in the 1930s.