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In reply to the discussion: Warren, McCain introduce bill to bring back Glass-Steagall [View all]shaayecanaan
(6,068 posts)the problem wasn't the repeal of Glass-Steagall, the problem was that a bunch of banks were writing mortgages with their eyes shut.
Glass Steagall prevented retail banks from running investment banks on the side. It still does, largely. What Bill Clinton did was allow vanilla banks and investment banks to be held by the one holding company.
The banks that ran into trouble in 2008 (Bear Sterns, Lehmann, Fanny Mae, Freddie Mac, etc) were all banks that were fully entitled to issue residential loans, with or without Glass Steagall. Even if Glass Steagall hadnt been repealed, they still would have hit the wall.
The problem is inherent in banking itself. No one gives a shit which bank that they get their loan from, one bank's money is as good as another.
There are only three ways, therefore, in which a bank can effectively compete or expand its market share. One is by assuming monopoly power, by buying competitors or becoming effectively the only game in town.
Two, by reducing interest rates on loans, to offer people the cheapest deal and attract them away from the competition.
Three, by reducing lending standards, to be able to offer loans to more people.
Number two and number three inevitably lead to ruin (specifically, number two led to the savings and loans crisis during the 80s, and the relaxation of lending standards had a big impact in 2008).
The problem with American banks is not that they are too big, but that they are too small and numerous. They therefore have to enter into genuine competition with each other. Competition leads to winners and losers. Losers typically go broke. Banks going broke is not a good thing.
The countries that have avoided banking collapses are typically those dominated by huge oligopolies (Canada, Australia) that make reliable profits because they prevent genuine competition.
The preferable alternative is that the banking sector is nationalised by the government. Given that the government effectively assumes the risks of the banks anyway, this is really just cutting out the middleman.