Here’s a sample of the silly ideas floating around, and some sane reaction.
Repeal Gramm Leach Bliley.
--No. [from Marginal Revolution]
The Act enabled financial diversification and thus it paved the way for a number of mergers. Citigroup became what it is today, for instance, because of the Act. Add Shearson and Primerica to the list. So far in the crisis times the diversification has done considerably more good than harm. Most importantly, GLB made it possible for JP Morgan to buy Bear Stearns and for Bank of America to buy Merrill Lynch. It's why Wachovia can consider a bid for Morgan Stanley. Wince all you want, but the reality is that we all owe a big thanks to Phil Gramm and others for pushing this legislation.
Bring back Glass-Steagall
--No. (Again from MR).
Many wise people are now recognizing that the repeal of Glass-Steagall was one of the few saving graces of the current crisis. Eugene White, for example, found that national banks with security affiliates were much less likely to fail than banks without affiliates. Randall Krozner (now at the Fed.) and Raghuram Rajan found that (jstor) securities issued by unified banks were (ex-post) of higher quality that those issued by investment banks. A powerful book by George Benston went through the entire Pecora hearings which supposedly revealed the problems with unified banking and found them to be a complete sham. My colleague, Carlos Ramirez later showed that the separation of commercial and investment banking increased the cost of external finance (jstor).
Add a host of new regulations:
--No, from David Brooks, HT MR.
[T]he idea that our problems stem from light regulation and could be solved by more regulation doesn’t fit all the facts. The current financial crisis is centered around highly regulated investment banks, while lightly regulated hedge funds are not doing so badly. Two of the biggest miscreants were Fannie Mae and Freddie Mac, which, in theory, “were probably the world’s most heavily supervised financial institutions,” according to Jonathan Kay of The Financial Times. * * * [T]his supposed new era of federal activism is going to confront some old problems: the lack of information available to government planners, the inability to keep up with or control complex economic systems, the fact that political considerations invariably distort the best laid plans
Banning short selling
There’s a lot of evidence that short-selling increases market efficiency. Do we really want less information about the value of financial stocks?
Voting. Well, McCain hasn’t exactly covered himself in glory. Prof B calls his attack on Cox “moronic.” I sympathize, but what’s Obama’s plan? To let the dynamic free market handle this? Not.
Meanwhile, we need information. As indicated above, Marginal Revolution has been a great source of sanity. Another one, John Carney, is moving to new digs. Let's hope he gets even noisier.
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