Cornerbacks and WSJ Editorial Writers

Moreover, some of the Senators seem worried that repealing Glass-Steagall might open up markets to terrible and maybe unforeseen risks. That’s a natural fear among folks who were mostly out of school decades before modern financial instruments appeared on the scene. It might not be a bad idea, in fact, if they added one more amendment to HR10, allotting themselves annual refresher courses in modern finance. That way, if along with the benefits of repealing Glass-Steagall unforeseen problems arise, our legislators will be equipped to respond appropriately to the demands of modern markets.

REVIEW & OUTLOOK (Editorial)
“Shattering Glass-Steagall — II”
The Wall Street Journal
22 June 1998

Paul Volcker must be smiling at that one. Like Bank of England Governor Mervyn King (see below), the former Fed Chairman argued in Obama circles that a better way to regulate banks is to separate the riskiest trading activities from those that accept taxpayer guaranteed deposits. That reform would have moved the riskiest proprietary trading out of taxpayer-protected institutions. But the White House and Treasury deemed this too politically difficult, so instead they are now regulating the pay of bankers as an alternative way to diminish those risks. Good luck.

“Our New Paymasters
Wage controls are politically easier than genuine reforms,”
same page, today.

I’m not the world’s biggest stickler for consistency. It really can be the hobgoblin of little minds, I realize. But does it occur to our friends at “Review & Outlook” that is it strange today to imply that it is a good thing to separate risk-taking from insured-deposit taking, when for many years they have advocated exactly the opposite?

As with cornerbacks and relief pitchers, it’s good if you’re a WSJ editorial writer to have a short memory.

A decade ago, back when the current catastrophe was just a premonition keeping Byron Dorgan awake at night, the page argued until it was blue in the face that repeal of Glass-Steagall was necessary to bring U.S. banking into the “modern age.” That law—the vestige of Depression-era thinking, passed before “modern finance” took care of the “terrible and unforeseen risk” thing, apparently—did indeed separate “the riskiest trading activities from those that accept taxpayer guaranteed deposits.”

Today, wrapping itself in the mantle of Paul Volcker, the Journal as much as says that a Glass-Steagall type separation might be a good idea after all, and should be implemented, if only the Obama administration didn’t shrink from tasks it finds “politically difficult.” Hmm. I wonder where the opposition might come from? Well, from the Journal editorial page itself, of course, which has been on a campaign to debunk the idea that Glass-Steagall repeal had anything to do with our current problems. As it said a year ago:

A running cliché of the political left and the press corps these days is that our current financial problems all flow from Congress’s 1999 decision to repeal the Glass-Steagall Act of 1933 that separated commercial and investment banking [etc. etc].

So repealing Glass-Steagall, which separated insured deposits from investment banking, was a good thing, then and now, but combining proprietary trading, which is a big part of investment banking, with insured deposits is bad and would be banned if the Obama administration had the will to buck opposition from people like, um, us.

This reminds me of trying to square R&O’s longstanding advocacy of federalism with its championing of the U.S. office of the comptroller of the currency, of all things, in its pitched fight against state banking regulators trying to control the running-amok mortgage industry (more on that here and here).

The OCC has a large staff of economists whose only job is to perform the sort of sophisticated statistical modeling needed to discover relevant disparities between loan approvals and denials or in pricing. Any red flags are followed up with in-depth examinations of loan files. The agency also has staff members on-site at large banks to monitor lending practices. (1)

Oh, well, skip it. They’re already lining up for the next play.

1. “Spitzer Meets His Match”; 1 June 2005. See also: “Subprime Politics,” and 7 February 2007” and “The Discriminating Mr. Spitzer”; 13 October 2005

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Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.