A Proper Accounting of Glass-Steagall

ver the past two decades in the United States and Europe, elite decision-making has hit an extended rough patch. Fairly or not, a lot of important public policy decisions have turned out horribly for the best and brightest. Whether that involved running a stratospherically levered financial institution hurtling into the financial crisis; or the government encouraging the sale of mortgages to people who could hardly afford to pay them back under any realistic scenario; or the creation of a single currency union without any effective fiscal or political union; or invading a country with little thought given to what comes next—elites have proven themselves at best all too human or, worse, inclined to pursue the counterintuitive and abstract with little apparent concern for real-world consequences. No doubt many will quibble, but to locate the starting point of these last twenty mostly regrettable years of elite decision-making, we could do worse than to begin with the repeal of the Glass-Steagall Act in 1999 (more precisely, the 1999 repeal of the prohibition under the Glass-Steagall Act of insured banks being affiliated with firms like investment banks that engage in securities underwriting),1 and the failure to regulate the pervasive use of derivatives by commercial and investment banks. Taken together with U.S. housing policy under the Clinton and Bush administrations, these three policy failures accounted for the alarming increase in leverage in the overall economy and the enormous growth of large financial institutions in the years preceding the global financial crisis.