Gramm-Leach-Bliley Caused Financial Meltdown

David Leonhardt of The New York Times disappointed me tremendously this week.

I'm not sure why he would make such a clumsy attempt to defend one of the most odious pieces of legislation in the past ten years (and that's saying a lot), but he did. It's hard to believe that an erudite fellow like Mr. Leonhardt could be so glaringly ignorant, but I don't look good in tinfoil so I'll just give him the benefit of the doubt and say he's not willfully ignorant in defending the Gramm-Leach-Bliley Act.

Leonhardt backs up his claim that the Gramm-Leach-Bliley is not culpable in this mess by making an egregious sin of omission, to wit:

"The point of Gramm-Leach-Bliley was to tear down the wall, built by Glass-Steagall, separating banks that did risky investing from those that did basic lending."

Well, ummm... no. The point of the law was to make hare-brained investment schemes like credit-default swaps possible, but that's of marginal importance.

What about insurance, Mr. Leonhardt? The Gramm-Leach-Bliley Act demolished the wall of separation between investment and commercial banking, but it also did a number on the wall between insurance and both types of banking. This is a key omission because, with that barrier gone, investment banks were free to play the insurance game, and the credit-default swaps that brought these behemoths to their knees are, at root, insurance products. No staid old pre-Gramm-Leach-Bliley insurance company would have touched them, and investment banks constrained by Glass-Steagall would have been prudently prohibited from dealing in them.

Lest we forget, the "liars' loans" themselves would not have been possible without the exotic instruments backing them.

Why would Mr. Leonhardt defend this law which was the spark plug (if not the engine) of all that has transpired over the past few months? I suspect that it is because he wants to release President Clinton of partial responsibility for causing The Greater Depression™, but that's just speculation on my part.

One more thing about the destruction of Glass-Steagall: Merging commercial and investment banks is a really stupid idea. Investment banks take risks that should not be made with the deposits of millions of hard-working people. Even if Gramm-Leach-Bliley had not caused this mess, it would cause another down the road. CitiGroup is one margin call away from an unrecoverable $70 billion collapse. Goldman Sachs would have gone down with AIG if not for the bailout. WaMu would probably still be around today if it had stuck to a classic, safe commercial banking business model, as would IndyMac and so many others.

At any rate, Mr. Leonhardt's candy-coating the devastating effects of the repeal of Glass-Steagall could not stand. None of this would have happened had it not been for that bit of horrible legislation, the one that tarnishes President Clinton's record far more than any BJ under the Oval Office desk ever could.

Here's hoping that the next Congress and president have the wisdom to repeal this turd.

Here's who voted for Gramm-Leach-Bliley. Looks like the Democrats got that one right. What was Clinton thinking? Oh, right he was preoccupied by the Great Cock Hunt.