Who Caused the Economic Crisis?

Last year the liberal writer Robert Kuttner, in a piece in The American Prospect, argued that "this old-fashioned panic is a child of deregulation." But even he didn't lay the blame primarily on Gramm-Leach-Bliley. Instead, he described "serial bouts of financial deregulation" going back to the 1970s. And he laid blame on policies of the Federal Reserve Board under Alan Greenspan, saying "the Fed has become the chief enabler of a dangerously speculative economy."

What Gramm-Leach-Bliley did was to allow commercial banks to get into investment banking. Commercial banks are the type that accept deposits and make loans such as mortgages; investment banks accept money for investment into stocks and commodities. In 1998, regulators had allowed Citicorp, a commercial bank, to acquire Traveler's Group, an insurance company that was partly involved in investment banking, to form Citigroup. That was seen as a signal that Glass-Steagall was a dead letter as a practical matter, and Gramm-Leach-Bliley made its repeal formal. But it had little to do with mortgages.

Actually, deregulated banks were not the major culprits in the current debacle. Bank of America, Citigroup, Wells Fargo and J.P. Morgan Chase have weathered the financial crisis in reasonably good shape, while Bear Stearns collapsed and Lehman Brothers has entered bankruptcy, to name but two of the investment banks which had remained independent despite the repeal of Glass-Steagall.

Observers as diverse as former Clinton Treasury official and current Berkeley economist Brad DeLong and George Mason University's Tyler Cowen, a libertarian, have praised Gramm-Leach-Bliley has having softened the crisis. The deregulation allowed Bank of America and J.P. Morgan Chase to acquire Merrill Lynch and Bear Stearns. And Goldman Sachs and Morgan Stanley have now converted themselves into unified banks to better ride out the storm. That idea is also endorsed by former President Clinton himself, who, in an interview with Maria Bartiromo published in the Sept. 24 issue of Business Week, said he had no regrets about signing the repeal of Glass-Steagall:

Bill Clinton (Sept. 24): Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn't signed that bill. ...You know, Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into.

No, Blame the Democrats!

McCain-Palin 2008 Ad: "Rein"
Narrator: John McCain fought to rein in Fannie and Freddie.

The Post says: McCain "pushed for stronger regulation"..."while Mr. Obama was notably silent."

But, Democrats blocked the reforms.

Loans soared. Then, the bubble burst. And, taxpayers are on the hook for billions.