A colleague offers us Stephen Labaton’s November 5, 1999 New York Times article “Congress Passes Wide-Ranging Law Easing Bank Laws”:
“Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” Treasury Secretary Lawrence H. Summers said. “This historic legislation will better enable American companies to compete in the new economy.” [...]
“I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930′s is true in 2010,” said Senator Byron L. Dorgan, Democrat of North Dakota. “I wasn’t around during the 1930′s or the debate over Glass-Steagall. But I was here in the early 1980′s when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”
I think it’s pretty clear, when you look at it in detail, that you can’t really point to the current situation and say “aha! if only Glass-Steagall were on the books this wouldn’t have happened!” That’s not at all clear. Among other things, by this time Glass-Steagall was already a bit of a dead letter thanks to a series of successive administrations who didn’t really believe in its spirit.
That said, the debate over the spirit of the laws was an important one. Summers and Dorgan weren’t just talking about a technical issue of bank regulation, they were talking about contrasting philosophical approaches. To Summers, Depression-era regulations were outdated, and reflected a no-longer-needed sense of panic and populist outrage. Modern-day knowledge of the financial system, both inside banks and inside policy circles, meant that we didn’t need to have those kind of fears of a panic that we wouldn’t be able to deal with. Meanwhile, hobbling financial institutions with crude regulatory barriers was likely to real harm. It was important to “better enable American companies to compete in the new economy.” Dorgan, by contrast, saw the world more through the lens of uncertainty. Previous bouts of financial deregulation had led to problems. And the post-Depression banking system had proven compatible with decades of economic growth. To throw caution to the wind on the assumption that the problems of the past wouldn’t re-arise seemed like hubris.
Needless to say, we’re only a few years into the 21st century and the “rules for the 21st century” don’t seem to have worked very well. In retrospect, it’s not entirely clear what the benefits of allowing the creation of extremely large financial conglomerates was. For a while, they appeared to be powering economic growth, but in retrospect a lot of the profits associated with big-time finance seem to have been illusory. But the problems associated with this approach seem real enough.