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Pearlstein starts his column by challenging the narrative that the repeal of Glass-Steagall had a material role in the recent financial crisis. Pearlstein states: “Repeal of Glass-Steagall has become for the Democratic left what Fannie Mae and Freddie Mac are for the Republican right — a simple and facially plausible conspiracy theory about the crisis that reinforces what they already believed about financial markets and economic policy. But why let facts get in the way of a good screenplay?”
Why does he believe that this narrative is incorrect?
Facts such as that Bear Stearns, Lehman Brothers and Merrill Lynch — three institutions at the heart of the crisis — were pure investment banks that had never crossed the old line into commercial banking. The same goes for Goldman Sachs, another favorite villain of the left.
But that was as much a problem at the banks and investment banks that combined as those that remained independent. More significantly, the bulk of the money that flowed through the shadow banking system didn’t come from government-insured bank deposits. It came from money market funds, hedge funds, pension funds, insurance companies, foreign banks and foreign central banks.
Specifically, why does he believe that Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, Wachovia, Washington Mutual, and Bank of America don’t fit the “blame the crisis on the repeal of Glass-Steagall” narrative
Because they were pure investment banks that had never crossed the old line into commercial banking
What about J.P. Morgan Chase and Wells Fargo?
J.P. Morgan and Wells Fargo — two large banks with big investment banking arms — resisted taking government capital and arguably could have weathered the crisis without it.
What is Pearlstein’s view on whether the bulk of the money that flowed through the shadow banking system came from government-insured bank deposits?
More significantly, the bulk of the money that flowed through the shadow banking system didn’t come from government-insured bank deposits. It came from money market funds, hedge funds, pension funds, insurance companies, foreign banks and foreign central banks.
What is Pearlstein’s view on whether the repeal of Glass-Steagall is responsible for bank consolidation?
He has constantly wrote about the affects of bank consolidations and how it has changed the financial industry:
>oligopoly that has reduced price competition in the market for many financial service
> That has allowed the industry to earn operating profits well above those of more competitive industries
- > And those excess profits — largely captured by the top executives,
- bankers and traders in the form of bonuses — create the perverse
- incentives to take excess risk and cut corners.
> Excessive bank consolidation has left us with megabanks that are too large and complex to properly manage and regulate
> size and complexity of the bank make it hard for regulators to manage
What factors does Pearlstein cite as causes of the financial crisis?
> is the willingness of our trading partners to finance our trade deficit with an artificially low interest rate and an artificially high exchange rate
> the growth of a vast new shadow banking system largely outside the reach of regulators.
> Shoddy lenders, foolish borrowers and investors, greedy investment bankers, compromised appraisers and ratings analysts, clueless regulators
Do you think Pearlstein’s column is persuasive regarding whether the repeal of Glass-Steagall was a factor in the financial crisis? Why or why not?
I am not sure he was that persuasive. First, he should have explained Glass-Steagall act and more hard evidence, but he made me research it on my own. However, some of the premises I wish he could have added links to his arguments.