Trump Considering Glass-Steagall Banking Regulations That Would Not Have Stopped 2008 Financial Crisis

During an interview with Bloomberg on Monday, President Donald Trump said he is considering a way to break up major banks:

During the presidential campaign, Trump called for a “21st century” version of the 1933 Glass-Steagall law that required the separation of consumer lending and investment banking. The 2016 Republican party platform also backed restoring the legal barrier, which was repealed in 1999 under a financial deregulation signed by then-President Bill Clinton.

Bloomberg quotes Trump, who said: “There’s some people that want to go back to the old system, right? So we’re going to look at that.”

Many progressives, including Senators Elizabeth Warren (D-MA) and Bernie Sanders (I-VT), want to reimpose the Glass-Steagall regulations, or something similar to them. They believe that the lack of such regulation played a major factor in the 2008 financial crisis.

In 2015, Warren said:

“That high wall between high-risk trading and boring banking was punched full of holes until in the late 1990s, it was knocked down when Glass-Steagall was eventually repealed…And not long after that, the worst crash since the 1930s hit the American economy.”

Here’s the problem: First, Glass-Steagall wasn’t fully “repealed.” According to Forbes, President Clinton “left the bulk of Glass-Steagall in place,” although he did put the kibosh on “affiliation restrictions, freeing up holding companies to own both commercial and investment banks.” Second, not everyone believes the semi-repeal of Glass-Steagall was the stone that shattered the glass house in 2008.

Once again, from Forbes:

There is zero evidence [Clinton’s] change unleashed the financial crisis. If you tally the institutions that ran into severe problems in 2008-09, the list includes Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, and Fannie Mae and Freddie Mac, none of which would have come under Glass-Steagall’s restrictions.

Even President Obama has recently acknowledged that “there is not evidence that having Glass-Steagall in place would somehow change the dynamic.”

As for the FDIC-insured commercial banks that ran into trouble, the record is also clear: what got them into trouble were not activities restricted by Glass-Steagall. Their problems arose from investments in residential mortgages and residential mortgage-backed securities—investments they had always been free to engage in.

Oonagh McDonald of the CATO Institute adds:

…during the recent financial crisis, commercial bank failures were largely driven by credit losses on real estate loans. The banks that failed generally pursued high-risk business strategies that combined nontraditional funding sources with aggressive subprime lending. Glass-Steagall would not have stopped any of this. Nor could it have stopped standalone investment banks, such as Lehman Brothers, from running into trouble.

…the rapid growth in subprime lending from 1995 onward was entirely the result of political commitments to “affordable housing,” and the implementation of related policies by the Department of Housing and Urban Development.

This resulted in at least 28 million subprime or weak mortgages in the financial system by 2008 — over half of all outstanding mortgages. It was these mortgages, and not the alleged deregulation brought about by Glass-Steagall’s partial repeal, that lay at the heart of the financial crisis.

So, if the regulations in Glass-Steagall wouldn’t have prevented the 2008 financial crash, why look into reviving them?

It’s good PR.

Both Democrats and Republicans have blamed the 2008 financial crisis, at least in part, on the repeal of certain Glass-Steagall regulations. It’s an easy story to sell. The greedy bankers need to be regulated!

Elizabeth Warren herself said in May of 2012:

“…even if [Glass-Steagall] wouldn’t have prevented the financial crisis…it’s an easy issue for the public to understand…you can build public attention behind it.”

Trump likes good PR, and announcing that he’s “looking at” Glass-Steagall regulations is an easy win. Regulation always sounds reasonable, and most Americans won’t bother to look into the issue themselves.