At the closing bell on Friday, the Dow Jones Industrial Average was up 368 points, to 11388.44. That's still not back to where it began the week, 11421.99, but it's not far off. Investors seem assuaged by the government's commitment to spend possibly as much as one trillion dollars taking mortgage-related assets off the books of American financial corporations. An extra reason to celebrate: at the end of the business day in New York, no major financial institutions appeared in imminent danger of collapse.
Partisans of every persuasion are likely hoping that the worst is over, and no further surprises on the threaten-systemic-collapse scale are looming. But the debate over how government should properly regulate the economy -- a staple of American political life for centuries -- is far from over. It's just getting going!
So let's step back for a moment, away from the immediate headlines. Exhausted by the pace of keeping up with minute-by-minute financial chaos, I took a break for the last hour or so and read Alex Tabarrok's "The Separation of Commercial and Investment Banking: The Morgans vs. The Rockefellers," published in the Quarterly Journal of Austrian Economics in 1998.
Alex Tabarrok is a professor of economics at George Mason University. He co-authors the popular Marginal Revolution blog with Tyler Cowen, and he leans strongly libertarian (a point that his appearance in The Quarterly Journal of Austrian Economics underlines, as the publication is a standard-bearer for academic libertarian economics.)
Libertarians feel a bit under siege right now, while progressive leftwing bloggers feel their oats, interpreting every new headline from Wall Street as proof of the failure of the deregulatory wave set off by the Reagan revolution. As I noted earlier this week, we've been hearing a lot about the 1999 repeal of the Glass-Steagall Act lately, because for some pundits, it seems pretty easy to connect the dots between the demise of this landmark piece of Great Depression-era legislation and the explosion of bad behavior on Wall Street in recent years. Glass-Steagall broke up the banking industry by separating commercial banks from investment banks. Gramm-Leach-Bliley removed that restriction in 1999. Now, investment banks are dropping like flies, and a new era of super-banks, or, as Tabarrok refers to them, "unified" banks, appears to have begun. And it's all Gramm-Leach-Bliley's fault, cry the unrepentant New Deal regulators.
Tabarrok isn't having any of it. Last night, he blasted out a blog post arguing that "Many wise people are now recognizing that the repeal of Glass-Steagall was one of the few saving graces of the current crisis."
Tabarrok's argument is that without the repeal of Glass-Steagall, the beleaguered investment banks who are currently falling into the arms of commercial banks, such as Bank of America or JP Morgan Chase, would have nowhere to go. "Unified banks" he writes, are actually safer and more stable than their separated counterparts. What's more, he contends, historically speaking this was also true during the Great Depression and before the passage of Glass-Steagall.
The thesis of his paper is that although the explanation provided by the Roosevelt administration for the passage of Glass-Steagall was that the interests of the general public would be be better protected if banks were broken up into commercial and investment flavors, the truth is that the real power pushing the legislation was the Rockefeller family, attempting tout maneuver their great rivals, the House of Morgan. Rockefeller's banking interests, it is true, were hurt by Glass-Steagall, but not as much as Morgan's were. By raising the operating costs of its rival, Rockefeller profited.
Let me confess that I do not know enough about Glass-Steagall and Great Depression-era banking history to evaluate the validity of Tabarrok's thesis. But Tabarrok's paper makes for interesting reading, and I can see no reason to deny that both the Rockefeller and Morgan families exerted enormous power over the legislative process, and were always struggling mightily to bend the rules to their advantage. At the very least, the rivalry was part of the Glass-Steagall story, if not the whole of it. I look forward to learning more -- Tabarrok draws heavily on Ron Chernow's 1990 book, "The House of Morgan and the Rise of Modern Finance" -- a book now winging its way to me via Amazon.
But my question is, what, if anything, has changed since then? Why should we think that Gramm-Leach-Bliley, or the Commodity Futures Modernization Act of 2000 are any different from Glass-Steagall, in terms of being manipulated by private interests? I don't know too much about Gramm-Leach-Bliley, but I think it is abundantly clear from the evidence that Enron, with the stout help of Sen. Phil Gramm, influenced the language of the Commodity Futures Modernization Act, with attendant vast ramifications for how entire classes of financial derivative products were regulated (or not regulated, as the case may be.)
Conservatives and libertarians are quick to paint progressives as conspiracy theorists for seeing Wall Street manipulation behind every new piece of Congressional regulation or deregulation. But isn't that how it's always worked? Powerful interests manipulate the laws. As a society, we have two ways to deal with this: Get rid of the laws and live in some kind of fantasy Ron Paul wonderland where tooth-and-claw reign supreme, where there is no central bank and everybody gets to mint their own money, or work steadily and painfully at coming up with better laws and better regulations, particularly in cases, like the domain of high finance, where it is now exceedingly hard to argue that a hands-off approach is the best way forward.
UPDATE: As if to underline the sentence in which I wrote "I don't know too much about Gramm-Leach-Bliley," I managed to misspell "Bliley" as "Bailey" four times in this post. Very embarrassing, and all I can say is that by the end of this week, I will be considerably better informed.