Wednesday, August 24, 2016

Secretary of the Treasury Timothy Geithner was correct when he said the problems at the heart of the financial crisis had “nothing to do with Glass-Steagall.”

See The Return of Glass-Steagall??? by Alex Tabarrok.
"The Atlantic writes:
Hillary Clinton and Donald Trump, have included plans to reintroduce the [Glass-Steagall] bill in their economic platforms. The argument for the act is that it could have prevented (or at least dampened) the 2008 financial crisis, and that reinstating it could ward off future ones. Is that the case?
The Atlantic’s editors reached out to economists and experts in financial regulation to ask them why Glass-Steagall is seeing renewed popularity right now, and what they think would make America’s financial system safer in the future.
Here’s part of what I had to say:
When Black Lives Matter calls for a restoration of the Glass-Steagall Act we know that the Act has exited the realm of policy and entered that of mythology. No, restoring the Glass-Steagall Act would not end racism. Nor would restoring Glass-Steagall have done much, if anything, to have avoided the 2008-2009 financial crisis. Secretary of the Treasury Timothy Geithner was correct when he said the problems at the heart of the financial crisis had “nothing to do with Glass-Steagall.”
The financial crisis is best understood as a run on the shadow banking system, that collection of financial intermediaries who based their credit creation not on deposits but on repo, money market funds, structured investment vehicles, asset-backed securitizations and other financial structures. Separate commercial and investment banking? Please. The problem was that by 2007 the shadow banking system had become so separated from commercial banking that the Federal Reserve didn’t know that a majority of credit was being generated by the shadow banks.
…“Nothing has been done!” may play well in some quarters but the Obama administration has in fact imposed systematic reform on the financial system. Most importantly, capital requirements have been increased (leverage has been reduced), forcing financial intermediaries to have greater skin in the game and to provide a cushion in the event of a fall in asset prices. Moreover, capital requirements have been extended far into the shadow banking system. Most recently, the Fed has imposed a capital surcharge on the biggest institutions i.e. the too big to fail institutions.
…Ironically, despite the political power of the financial sector it seems that more has been done to raise bank capital ratios than to require homeowners to raise their capital ratios by requiring larger down payments. There is a lesson there.
Robert Reich, Sheila Bair, Lawrence White, Stephen G. Cecchetti and others also comment. Only Reich, with some support from Blair, is enthusiastic."

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