Many pundits jumped on former Citigroup chairman Sandy Weill after his call to break up the banks and re-adopt some version of the depression era Glass-Steagall act, which forbade commercial and investments banks from being in the same holding company. The law was repealed in 1999. Steve Pearlstein in the Sunday Washington Post, for instance, pointed out that the institutions that cratered in 2008 — Lehman Brothers, Bear Stearns, AIG, Merrill Lynch — were not the big financial supermarkets, but were stand alone institutions. Glass Steagall would not have prevented their implosion.
Hogwash. Barry Ritholtz on the Economonitor blog (he occasionally writes for the Sunday New York Times business section) has a worthy antidote to that conventional wisdom, headlined “Glass Steagall Repeal Made Crisis Worse.” His argument, in short, is that megabanks helped make financial engineering the center of the U.S. economy — along with the hedge funds, the LBO craze and other manifestations of past 30 years “era of greed” where earning exorbitant salaries and creating huge fortunes by buying and selling businesses (think Bain Capital) triumphed over making goods and providing services. By the mid-2000s, the financial sector accounted for more than 40 percent of all business profits in the U.S., a stunning level of misplaced priorities. Ritzholtz concludes his excellent piece: “We should be finding ways to definancialize the US economy, and reduce the influence of bankers.” Bringing back Glass-Steagall would be a good place to start.
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