2016 Postmortem
In reply to the discussion: Hillary Clinton opposes breaking up the megabanks, opposes reinstating Glass-Steagall [View all]Rilgin
(787 posts)Last edited Tue Jul 14, 2015, 03:18 AM - Edit history (2)
The S&L crisis occurred after the banking regulations were relaxed and
S&Ls were allowed to do more than take deposits and lend money. There is always a little more complexity but mostly in the reasons for the deregulation. The boring banking system was under threat from non-bank banks who found a loophole to avoid banking regulation and could offer checking accounts with interest which at the time was not allowed. These accounts were not guaranteed by the FDIC but were causing depository flight and the banks were scrambling to compete. The regulators could have just closed the loophole as they had done all previous loopholes and closed the non-bank banks but they didnt, instead they started experimenting with deregulation concepts.
As I said, I am not a current expert. However, the old regulations were air tight and based on what I believe is a fundamentally sound principal. The banking system was very boring and safe. Risk took place outside of that system and fell only on the investors and owners not the public. This was through more than glass steagall but a highly integrated system of regulation and an attention to regulation that basically could be summed up as "If you are a bank, be a bank. Take in money and make loans. If you want to do anything else, you cannot be a bank". As one of my projects as a young attorney, I read ever single letter written to banking regulators requesting opinions if banks could expand their activities. Up until the deregulation, the answer was always no. After carter and Reagan, the activities were expanded and ultimately led to the first banking crisis...the S&L Crisis.
Whether the current system could work is possible. However, we can say categorically that the old regulations worked to avert banking failures. The incidence of failure was almost non-existent for 50 years. Meanwhile our country was also more stable, fewer bubbles, less wealth disparity and a stronger middle class. In addition, the financial sector as a proportion of GDP was considerably less under the older regime and the proportion of productive industries higher. I think this is related. I personally believe we do not need banks to perform risk taking and think we have a safer economic system under a regime that isolates the basic financial system from both risks and temptation.