Okay, Col. — now Congressman — Allen West was fuzzy on some details. All the better to fit in with many of his colleagues.
However, in focusing on Glass-Steagall’s repeal, West picked up on a crucial point.
Roughly, Congress put longer-term credit creation in one place (commercial banks) and shorter-term speculation in another place (investment banks).
Lawmakers knew that it was okay for the stock market to lose value suddenly, causing great losses — but that it was not okay for long-term lenders to stop lending to all long-term borrowers, no matter how good the borrowers’ credit. So, Congress tried to separate the two, in hopes that they didn’t interfere with each other too much.
As regulators let old protections fall away, people began to get their credit not directly from banks who held long-term loans on their books, but indirectly from short-term speculators who used securities made up of long-term loans as fodder for short-term bets made with money borrowed overnight.
Over time, then, the business of long-term credit creation became much more susceptible to the type of panic that afflicts financial markets from time to time. The repeal of Glass-Steagall nearly twelve years ago wasn’t the beginning of this process, but close to the end.
Representative West would do a service to Congress and the country if he were to learn more about why we must go back to better insulating long-term credit creation from short-term speculation — in some ways, yes, going back to the philosophy that helped to create Glass-Steagall.
Part of the reason is to prevent bailouts. No matter what Congress says today, it will never stand by and let the economy’s store of credit evaporate because markets have gone too far on the way up and are over-correcting on the way down.
By at least acknowledging this imperfect marker in history, Representative West is off to a relatively good start.
— Nicole Gelinas is contributing editor to the Manhattan Institute’s City Journal and author of After the Fall.