The Repeal of the Glass-Steagall Act: Myth and Reality

The Glass-Steagall Act was enacted in 1933 in response to banking crises in the 1920s and early 1930s. It imposed the separation of commercial and investment banking. In 1999 Glass-Steagall was partially repealed by the Gramm-Leach-Bliley Act. When the United States suffered a severe financial crisis less than a decade later, some leapt to the conclusion that this repeal was at least partly to blame.

The effect of Glass-Steagall’s 1999 “repeal” has been exaggerated. The restrictions contained in Glass-Steagall were always subject to some exceptions, and moreover, the GLBA only repealed some elements of Glass-Steagall. The general prohibition on banks underwriting or dealing in securities remained intact. The truth is that the 2008 financial crisis had precious little to do with Glass-Steagall. It was caused primarily by bad lending policies, which in turn led to the growth of the subprime market. Even under Glass-Steagall, banks were allowed to buy and sell securities. Yet by focusing the public’s anger on “greed” and “overpaid bankers,” politicians have been able to divert attention from the ultimate cause of the financial crisis.

If politicians continue to believe that affordable housing can only be provided by encouraging banks to advance mortgages to potential homebuyers, and doing so with the help of government-sponsored enterprises, no one need look any further for the causes of the next financial crisis.

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