Who’s to Blame? (Editorial)

Recently, the Motley Fool set out to determine who’s more to blame for the current financial mess. The winner (if that’s the term) were those who repealed the Glass-Steagall Act.

Before Glass-Steagall became law, banks were investing in securities, putting their deposits at risk. They were making unsound loans, and because the bankers had a financial interest in the securities, they encouraged their customers to invest in them as well.

The 1933 legislation, part of President Franklin Roosevelt’s efforts to save the banking system at the height of the Great Depression, mandated a separation of commercial and investment banking to protect depositors from the hazards of risky investment and speculation.

During the heyday of deregulation, while Ronald Reagan was president, the banking industry began to lobby for repeal of Glass-Steagall. The debate was on the cover of the very first issue of Arkansas Business back in March 1984.

But it was 1999 before the repeal took place with the passage of the Gramm-Leach-Bliley Act.

At the repeal’s passage, The New York Times quoted Sen. Byron L. Dorgan, D-N.D.: “I think we will look back in 10 years’ time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930s is true in 2010.”

Dorgan went on to say, “I wasn’t around during the 1930s or the debate over Glass-Steagall. But I was here in the early 1980s when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.”

Looks like he nailed it.

There’s little doubt that repeal of Glass-Steagall has played a part in the current downturn, but how big a part remains debatable. More of the blame probably should be placed on a failure of regulation that allowed too much risk-taking and allowed some institutions to become “too big to fail.”

A recent Bloomberg News article quoted former Rep. Jim Leach, R-Iowa, one of the authors of the repeal: “There’s nothing any of these groups did that they couldn’t do before.” Rather, the fault lies with “the greatest regulatory breakdown in history, on the part of the Fed, the Treasury and the Securities & Exchange Commission.”

President Barack Obama also has blamed a lack of regulation for contributing to the crisis and has told his aides to work with Congress on shaping proposals for regulatory changes.

Although many will argue that a measure similar to the Glass-Steagall Act should be reinstated, we’re inclined to target lax enforcement by the regulatory agencies — and throw Congress into that bunch — which failed miserably at their jobs.