Things economists do know

So back a few months ago, during the ill-fated search for fingers to point at people with blame attached to them, we were given a line that somehow the repeal of Glass-Steagall sunk us. I'm still seeing this line pop up every now and again in the search for new rules to clean up the aftermarket effects. I'm trying to figure out where the hell it came from and why we can't send it back down that pit. Because this is one dog that doesn't bark for me. I have a much bigger problem with how we decided to deal with the problems of moral hazard and risk assessments through the FDIC and direct government loans to particular banks than I do with the mixing and blending of banking and investment activity.

Seems like, just like in the 1930s, people want to blame stock trading and some sort of stock bubble caused by investment firms as the problem. Meanwhile, you know what seems like a much bigger problem and which caused a whole lot of problems over the last couple years: bad real estate loans (and the mess of stuff they spawned in securitization and bonds and so on). Which were originated by normal banking activity and have nothing to do with Glass-Steagall. Sure Wall St has some splainin' to do, but it's not because we allowed them to blend their own drinks on this G-S front. It's basically because they took some heavy medications before they even got to the mixed drinks.

All one has to do to find a problem with this thesis is examine which institutions got into trouble, before we started throwing money around. They weren't mixed drink places. They were normal commercial banks (Countrywide, Wachovia, WaMu) or normal investment banks (Lehman, Bear Stearns, Merrill Lynch). I think the premise being approached with this notion to bring back the "bank killer" is that we need to lower the exposure on the "too-big to fail" banks by breaking them up. But we already have something called anti-trust laws that we could deploy. And it's pretty easy to establish larger risk modifications for our supersized banks that gets around the problem of needing to downside them in the first place. I don't see what the walls would accomplish that we can only use them to establish some sort of financial bulkhead to prevent a total system failure. I also don't see any evidence that they were necessary in the first place (to fix the problem back in the 30s).

I agree there's some laws that we do need that we nixed or didn't enforce. This isn't one of them. I would agree that if a bank wants to have behaviors that look like investing then it should have those behaviors follow the rules we've set down (along with whatever new ones we end up with) for investment firms. I don't think it matters if a bank does these things or not. If it's not good at them, then it will fail. If it is, then it will make more money for loans and other normal banking behaviors. My guess would be that most banks aren't good at it, and don't try it, because the essential function of a bank is issuing credit from deposits (repeatedly). They could very easily loan credit to people who want to invest on leverage without worrying about the direct risks to themselves (and thanks to inancial alchemy, they could simply securitize the loans).