Misguided Glass-Steagall nostalgia, part II: Lynn Short, a professor of business law at Cornell, doesn’t seem to know what in blazes she’s talking about:
History tells us what we can do to keep our financial institutions from collapsing in derivatives-fueled disasters. After the Depression, Congress passed the Glass-Steagall Act, which prohibited deposit-taking banks from indulging in risky proprietary trading. But thanks to intense lobbying, especially by Citibank, Congress eliminated that prohibition with the Gramm-Leach-Bliley Act of 1999. A year later, as part of the same deregulatory frenzy, Congress overturned state and federal laws that restricted speculative derivatives trading to “clearinghouses” run by regulated exchanges.
That wave of financial deregulation explained both the sudden rise of an enormous derivatives market and the trading disasters and institutional collapses that followed.
Short must not have seen Andrew Ross Sorkin’s piece. It’s not as if, prior to the repeal of Glass-Steagall, financial crises never happened. Oh boy, did they ever-around every seven years or so, if memory serves. And it wasn’t wild derivatives trading that caused the blowups, either, it was plain old dumb lending. Compared to what happened in subprime, the CDS market was a paragon of sobriety. . . P.S. Short seems not to understand how hedging works; she apparently thinks it’s some form of closet speculation. Just hope she’s not running a bank you’re invested in once interest rates start to rise in earnest. . .