but he totally wrecks Cornel West in this recent TV interview that I have deemed a must watch. Once Cornel West makes a fortune off of reading the market, I’ll start listening to his explanations of crises.
By the way, I’m fairly certain that everyone who pines for Glass-Steagall does not know what the hell it did. In a classic post from 09/08 Megan McArdle explained:
Even if you ignore the economic history indicating that Glass-Steagall didn’t help the crisis it was meant to solve–even if you assume, arguendo, that the repeal was a bad idea–there’s simply no logical reason to believe it had anything to do with the current mess.
Securitization was not introduced in the 1990s; it was invented in the 1970s and became popular in the 1980s, as chronicled in Liar’s Poker. (As an aside, if you haven’t read it, you really must. Especially now).
[The Gramm-Leach-Bliley act, which “repealed” Glass-Steagall] had nothing to do with either lending standards at commercial banks, or leverage ratios at broker-dealers, the two most plausible candidates for regulatory failure here.
Most importantly, commercial banks are not the main problems. If Glass-Steagall’s repeal had meaningfully contributed to [the 2008] crisis, we should see the failures concentrated among megabanks where speculation put deposits at risk. Instead we see the exact opposite: the failures are among either commercial banks with no significant investment arm (Washington Mutual, Countrywide), or standalone investment banks. It is the diversified financial institutions that are riding to the rescue.
Indeed.
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Anyone who liked Michael Lewis’s Liar’s Poker will also like his more recent, The Big Short. On the Causes of the 2008 subprime mortgage and banking crisis don’t miss Peter Wallison’s op-ed, Wall Street’s Gullible Occupiers in the Wall Street Journal on October 13th. To dig even deeper see Walison’s Dissent from the Majority Report of the Financial Crisis Inquiry Commission.
A Harvard senior wrote most of it. http://blogs.wsj.com/deals/2010/03/15/michael-lewiss-the-big-short-read-the-harvard-thesis-instead/
I didn’t know that. I so liked Lewis’s other books, Moneyball and The Blind Side, I just grabbed The Big Short and devoured it. Whoever wrote it, they cleared up my confusion over credit default swaps. Hope it’s all true. Hard to be sure of anything these days.
TeeJaw. You are right on. I enjoyed ‘The Big Short’ more than ‘Liars Poker’. Can’t understand how those guys stayed out of jail.
He destroyed West, and I loved every bit of it. West does what most psuedo-intellects do when confronted with pesky things like facts and logic: dismissive laughter. That cues those who take his side to nod in agreement and mutter inanities about how his opponent just doesn’t get it. It’s condescending and vain.
Has West ever wandered into a Tea Party rally and engaged anyone in intelligent conversation or debate?
Oh man, youtube is blocked here at work so I can’t watch Schiff vs. West until I get home tonight.
Cornell West is a walking-talking SNL skit. He is a complete caricature of himself.
If you asked him to diagram his solution to the whole OWS business, it would look like a Rube Goldberg contraption with lots of “social justice” wheels and levers.
Of course, if you told him it looked like a Rube Goldberg contraption, I’m sure he would then want nothing to do with the Jew-tainted solution.
Professor West … professor my arse.
Thank you for posting this, Professor. This is one of the best arguments for free markets I’ve seen since Melton Friedman.
Maybe repeal of Glass-Steagall’s wall between commercial and investment banking was not a decisive factor but McCardle’s argument was pure nonsense (pethaps forgivable since it was written in September 2008 when we did not yet know the facts).
If the big diversified financial companies were able to ride to the rescue instead of going bankrupt or being forced to be acquired like Lehman or Merrill Lynch, it was because the government decided (correctly, in my view) that failure of one one of the giant banks would collapse the financia system and proceded to bail them out and prop them up.
The big banks, conspicuously Citigroup and Bank of America had an enormous and deadly exposure to toxic mortgage backed securities — instruments that not long before they would have been forbudden to create, sell or trade — as well as plenty of other dubious assets
The top ten recipients of TARP bailout funds (whereby the Treasury bought the toxic MBSs)
included the nation’s biggest banks — BofA, Citi, Wells Fargo, JPMorgan Chase, etc. Hundreds of
other commercial banks likewise got taxpayer-funded relief from the MBSs on their balance sheets.
But that’s not all. The Federal Reserve lent at favorable super-low interest rates some $1.3 trillion to
financial institutions that included both those that were traditional investment banks like Goldman
and those with major commercial banking ooerations. Citibank and BofA each received close to $100 billion of these loans.
On top of that, all the commercial banks benefitted by the Fed’s decision to pay them higher interest on their reserve funds — another way ti pump extra dough into them. And of course, the massive bailout of AIG had the effect of channeling hundreds of billions more through the insurer to the banks of both descriptions.
So BofA and Citi, as well as Goldman and Morgan Stanley, were able to remain strong with public money and credit.
Now, would the commercial banks — Citi, BofA, Chase, Wells Fargo, etc. — have been vulnerable to collapse due to the sudden evaporation of the value of trillions in mortgage backed securities if Glass-Steagall had still barred them from investment banking? The answer is, no. They could not have been vulnerable to a business from which they were barred. That said, there is no way to know whether the banks would not have found some other way to get in on what everyone on the Street imagined for about a decade to be an endless gravy train. After all, banks were able to initiate and sell mortages. No one knows, but assuming they did, it could not have been as bad as what did happen.