Solutions So Bad Only Congress Could Think of Them

No organized body has mismatched problems and solutions more eggregiously in the history of mankind than the United States Congress. It would be humorous if it were not so tragic, and by tragic I mean, expensive. The latest batch of confused "problem-solving" comes from none other than John McCain, though he is joined by a good number of folks on the left.The issue I am referring to has to do with the proposed repeal of the Gramm-Leach-Bliley Act of 1999, which itself was a partial repeal of the Glass-Steagall Act of 1933. Bear with me - I am going somewhere with this. The Glass-Steagall Act banned commercial banks from participating in investment banking, and banned investment banks from participating in commercial banking. The idea was that different segments of the financial services universe could only be performed by different, segmented companies. The Gramm-Leach-Bliley Act of 1999, a bipartisan bill drafted by Phil Gramm and signed into law by Bill Clinton, did not repeal Glass-Steagall in its entirety; it merely updated select parts of it. But one of the effects of the 1999 law was that companies were allowed to have both an investment banking division, a securities division, and a banking division (as opposed to having to operate such as three different companies). Believe me, I could write an exhaustive piece as to why it is tremendously beneficial to consumers and investors for the 1999 Gramm bill to have been passed. But regardless of why I believe Glass-Steagall became bad law, and the repeal of many of its tenets to be a good thing, I think a larger issue exists here that has to be analyzed.The present drive to restore Glass-Steagall is a typical political attempt to look like they are doing something regardless of whether or not the something they are doing is even remotely effective. Unless someone wants to advocate the idea that Congress passing laws for no reason whatsoever is harmless, we ought not to encourage the practice of passing worthless laws that do nothing but window-dress. The financial crisis was not even remotely caused by the Gramm bill of 1999 and its partial repeal of Glass-Steagall. In fact, the existence of combined investment/commercial banks helped to save the system in the midst of the crisis, as institutions like JP Morgan were able to absorb Bear Stearns (an investment house), and Washington Mutual (a banking house), protecting creditors and depositors, and keeping counter-party risk from escalating out of control. The other example that comes to mind is Bank of America's acquisition of Merrill Lynch, as a Merrill failure would have caused an aftermath the likes of which would have made Lehman Brothers bankruptcy look like a walk in the park! These companies (JP Morgan, Bank of America, etc.) had the tentacles they had because of the 1999 law that allowed investment and banking divisions to exist within one company. Absent such capable institutions, the hangover of the financial crisis would surely have been far, far worse. What about the failed companies? Bear Stearns was a Glass-Steagall era firm: No commercial banking; singular focus on securities; they went kaput. Same goes for Lehman Brothers! Indymac and Washington Mutual had no securities business or investment banking services; they took in deposits, and loaned out money - classic traditional banking. Both of them collapsed under the weight of their atrocious commercial banking management. And AIG, the largest disaster of the crisis and the biggest recipient of bailout funds (by far), was neither an investment bank or a commercial bank - it was an insurance company totally unregulated by any of the oversight bodies normally responsible for regulating either kind of banking activity. With or without Glass-Steagall, AIG was toxic, and it was going to explode.The fact of the matter is this: Bad commercial banks deserve to go away, and bad investment banks deserve to go away, and bad combined banks deserve to go away. The fact that the regulators of the commercial banks failed in their basic duty to see what these banks were doing with depositor money has nothing to do with Glass-Steagall. The fact that the investment banks were leveraging their own balance sheets to another stratosphere had nothing to do with their commercial banking licenses; depositors funds were simply never at risk. It is an utter lie to say that the repeal of Glass-Steagall allowed investment banks to take checking account deposits and buy leveraged mortgage derivatives with them. The same regulations of bank depositor funds prior to 1999 exists to this day. A great deal of things caused the crisis of 2008, but this issue is just not one of them, and in fact, probably played a major role in containing some of the damage.The reason for McCain and others in Congress (and of course the media) to jump on this bandwagon is because it contains all the rhetorical tools necessary to sound like someone is doing something. I believe we need to resist tokenism at each and every opportunity, as (a) Token measures almost always come with malignant unintended consequences, and (b) Token measures often rationalize avoiding real substantive measures, as it surely will in this case. So far the major steps taken from Congress after 2008 deal with Glass-Steagall and executive compensation. Any serious commentator of the crisis from either side of the aisle is painfully aware that these issues are an utter waste of time in analyzing the crisis or avoiding the next one. What they are effective at doing is stoking populist rage and painting a picture of "taking action".This is just a typical case of a politician wanting to look like he is addressing a problem when, in fact, the politicians either lack the intelligence to address this financial mess, or worse (and more likely), they lack the moral courage.