Ryan Lizza, I Think, Misinterprets Jim Hines on Larry Summers
The $600B Stimulus Program: How We Got Here

Glass-Steagall and the Crisis

Joe Stiglitz thinks that the investment bank culture took over the commercial banks. I think that merging investment and commercial banks gave investment banks more stability in their liabilities that allowed them to ride out the storm more easily.

Alan Blinder agrees with me, which makes me happy.

Ryan Lizza:

Larry Summers and the White House economic team: Many critics have argued that Clinton’s 1999 repeal of the 1933 Glass-Steagall Act, which had separated commercial and investment banks, contributed to the meltdown last year. “It was a clear signal to the big banks to get much bigger and to become kind of financial supermarkets,” Robert Reich, Clinton’s first Labor Secretary, said. “It’s not the biggest factor, but it’s certainly a step along the way.” In an article on the causes of the current crisis, Joseph Stiglitz wrote, “When repeal of Glass-Steagall brought investment and commercial banks together, the investment-bank culture came out on top.”

But others note that the pure investment banks, like Lehman Brothers, have been the greatest source of instability, while the banks with combined commercial and investment arms have fared the best. “Banks did terrible things, investment banks did terrible things, a big insurance company named A.I.G. did terrible things, but basically none of that was enabled by the repeal of Glass-Steagall,” said Alan Blinder, an economist at Princeton, who had his share of confrontations with Summers when he was a member of the C.E.A., in the first two years of the Clinton Administration. Brad DeLong added, “To say that the breaking down of the Glass-Steagall wall between investment banks and commercial banks was the source of the current crisis is just wrong”...

Ryan Lizza on derivatives regulation:

However, the main criticism of a dozen economists, all of whom know Summers personally, is that during the late Clinton years, in two important cases, he seemed to forget his own warnings about financial markets. The first was a debate over opening up Asian markets to financial liberalization. Summers believed that several Asian countries, especially South Korea, were unfairly refusing to allow American financial-services firms to operate there. “The Asian countries kept pushing to regulate hedge funds, and these guys were dead set against it,” the friend of Rubin and Summers said. “They did have more belief in the ability of the financial markets and financial institutions to police themselves than now seems to be warranted, and that I think is a major issue.”

The second case cited against Summers is his hesitancy about regulating derivatives. In this instance, he was to the right of Rubin. Derivatives are contracts intended to perform the financially useful function of spreading risk. But in recent years they served mainly to concentrate it. In Rubin’s memoir, “In an Uncertain World: Tough Choices from Wall Street to Washington,” he describes the debate that he and Summers had over the issue. “Larry thought I was overly concerned with the risks of derivatives,” Rubin writes. “His argument was characteristic of many students of markets, who argue that derivatives serve an important purpose in allocating risk by letting each person take as much of whatever kind of risk he wants. Larry’s position held together under normal circumstances but seemed to me not to take into account what might happen under extraordinary circumstances.” Summers told me, “If we had known that derivatives markets would mushroom the way they did and that regulators would remain spectators, we would have acted. With hindsight, all of us with involvement in financial policy wish we had done more to forestall problems”...