At CPAC (the Conservative Political Action Conference), U.S. Rep. Allen West (R-FL) cited the 1999 repeal of the Glass-Steagall Act as the cause of the financial crisis.  He has a point: As long as Glass-Steagall was in place, we had no systemic collapse.

Banks that were busy underwriting crazy subprime securities—synthetic CDOs, synthetic CDOs squared, etc. (what we call toxic assets)—were at the heart of the crisis.  The Glass-Steagall Act of 1933, Congress’s response to the stock bubble of the 1920’s, provided that no bank “shall underwrite any issue of securities or stock.”  The idea of Glass-Steagall was simple: We need a safe place for ordinary people to deposit their money without having to worry about the risk proclivities of the bank.  The bank is limited to secured loans—and it is buttressed by deposit insurance and an implicit government guarantee.  Investment banks can serve those who want the risk and greater profit.  But those activities are on their own: They are not entitled to any public support—much less a $3.3 trillion bailout.

Peter Wallison, a Republican member of the Financial Crisis Inquiry Commission, disagrees: The repeal of Glass-Steagall played “no role” in the crisis.  The problem, he says, was government interference in the private-housing market.  Mr. Wallison believes that government policy to increase home ownership forced the private sector to make subprime loans.  Mr. Wallison supports his “no role” theory by changing history—he is recharacterizing the securities losses that busted the banks and which Glass-Steagall would have prevented.  In 2009, he wrote that “It would be correct to say, therefore, that banks suffered losses on these securities by acting as banks—as lenders—and not as the securities traders” (“Deregulation and the Financial Crisis”).  Yet the distinction between a mortgage and a mortgage-backed security is all the difference in the world.

In 1987, the Fed gutted Glass-Steagall by approving (in a 3-2 decision) the underwriting and dealing of mortgage-backed securities more generally.  This approval allowed “Section 20 subsidiaries” to underwrite and deal in securities that were not eligible to be underwritten or dealt in by the member bank.  Fed Chairman Paul Volcker dissented.  He and Board of Governors Member Wayne Angell noted,

Our point is not merely one of legal formalism.  The interpretation adopted by the majority would appear to make feasible as a matter of law, if not board policy, the affiliation of banks with some of the principal underwriting firms and investment houses of the country.  Such a legal result, we feel, is inconsistent with the intent of Congress in passing the Glass-Steagall Act.

On January 27, 2011, the Financial Crisis Inquiry Commission released its 545-page report on the causes of the financial and economic crisis of 2008.  Congress created the commission to examine 22 specific topics.  The commission held 19 days of public hearings and interviewed 700 witnesses.  Certainly, determining the causes of the crisis was a great idea.  The Bush and Obama administrations simply said we were in an economic meltdown and could only be saved by a multitrillion-dollar taxpayer bailout of the very financial institutions that had caused the trouble.  Both administrations said they had to violate free-market principles to save the free market.  Both administrations were short on the details of what form the meltdown was taking.  Both claimed we should be grateful to them for saving the country, but we may hesitate, since there is no way to know the past that didn’t happen.

We do need to be grateful to the only socialist U.S. senator, Bernie Sanders (I-VT).  He added a provision to the Dodd-Frank law forcing the Fed to disclose the dimensions of the bailout.  It seems $3.3 trillion was distributed from emergency lending programs put in place in 2008.  The Fed’s vaults were open not just to U.S. banks, as we thought, but to foreign banks, hedge funds, and General Electric.  Goldman Sachs, which consistently said it needed no help, borrowed from the fund each day between September 15 and November 26, 2008.

The breakdown and repeal of Glass-Steagall did more than transform statutory law; it contributed to the transformation of the culture of the financial industry.  The low-risk, conservative culture of Glass-Steagall gave way to the high-risk, high-reward culture of investment banking.  The growth of shadow banking, complex derivatives, “win-lose” credit-default swaps, and riskier loans, as well as empire building within the banking industry, were manifestations of a self-destructive culture.

We know the cause of the crisis—and the cure.  Now the people must answer: Do we want a financial industry dominated by high-risk-taking, highly leveraged megabanks?