I’m a reasonably conservative Republican, but am nonetheless having trouble thinking of a single idea John McCain has ever had that I actually agreed with. The latest is his proposal (which he’s putting forth with Elizabeth Warren) to restore a Glass-Steagall-ish separation between lending and trading in the banking industry, to prevent the next financial crisis. Or, as Warren hyperventilated to the New York Times last week, “The biggest banks continue to engage in dangerous high-risk practices that could once again put our economy at risk,”
Phooey. I understand that the plan is a publicity stunt by two major prima donnas that’s going nowhere, and I’ll grant, too, that this isn’t the absolutely worst idea that McCain ever had (that would be his entire 2008 presidential campaign). But this notion that, had Glass-Steagall been in place during the housing boom last decade, that the subsequent financial crisis would have been avoided is completely and utterly preposterous. As I say, typical McCain.
To begin with, it wasn’t any sort of mysterious trading by the banks that caused all the trouble. It was bad lending. Too many banks lent too much money to too many borrowers (subprime mortgage borrowers, in this case) who couldn’t afford to pay it back. When everyone realized that so many institutions were loaded down with the same bad paper, confidence in the system evaporated, interbank lending basically stopped, and the financial system nearly keeled over. Trading had nothing to do with it.
So it was credit problem, and extending credit, I hasten to remind Sens. McCain and Warren, is what banks do. If anything (as Dick Kovacevich and others never tire of reminding bank-bashers) allowing banks to offer financial services in addition to lending is a healthy diversification. One of the reasons companies such as Wells Fargo and JPMorgan Chase skated through the crisis so well is that their non-lending businesses held up even as credit costs ballooned.
Beliefs of the Glass-Steagall cult notwithstanding, the fact is that every major banking crackup in memory came about for the same reason: bad lending. Not derivatives trading. Not prop trading. Not securities underwriting. It was the lending that did it, to (depending on which crackup you’re talking about) developing countries, energy companies, real estate developers, you name it. In this case, it was mortgage borrowers. And contrary to what McCain and Warren believe, having a Glass-Steagall-like wall in place wouldn’t have done a thing to prevent the mess, nor will it prevent the next one. There are plenty of needed reforms I can think of that would make the banking system safer. This isn’t one of them.
What do you think? Let me know!