Bernie Sanders says if Congress had listened to him, there’d have been no financial crisis

Debating with Hillary Clinton Thursday night, Bernie Sanders argued that Congress’s decision to repeal an old law called Glass-Steagall over his objection led to the financial crisis of 2007-‘08.

I think as Secretary Clinton knows, there’s nobody who fought harder — I was on the House financial committee at that point — I heard the arguments coming from Democrats and Republicans. Robert Rubin, Alan Greenspan about how great an idea would be if we did away with Glass-Steagall and allowed investment banks to merge. Go to YouTube today. Look up Greenspan/Sanders. I helped lead the effort against deregulation. Unfortunately, we lost that. The result is, was, the worst financial disaster since the Great Depression.

The argument over whether Glass-Steagall was a good idea and should be reinstated is an interesting one with some good points on both sides, but the allegation that the Glass-Steagall repeal was the cause of the financial crisis is entirely unfounded.

What Glass-Steagall did was prevent a single company from engaging in both retail banking (taking deposits and making loans) and investment banking (underwriting securities and speculative trading), on the theory that you had to prevent a situation in which investment banking mistakes could lead to the loss of bank deposits. This is a legitimate thing to worry about, if you like, but it’s not what the problem was during the financial crisis.

Indeed, if you look at a sophisticated argument in favor of a new Glass-Steagall bill like the one made by economist (and Sanders supporter) Dean Baker, he doesn’t say that the combination of retail and investment banking caused the crisis. Indeed, he says the opposite. The crux of the real debate, Baker says, is that “there really is no downside” to banning combined banking, so Congress might as well do it on better safe than sorry grounds. Others, like Michael Grunwald and most of the economic policy team in the Obama administration think that combined banking makes the system moderately more stable.

Interestingly, Nordic countries like Sanders’s beloved Denmark have large universal banks that engage in all different kinds of banking.