The Continuation of Glass-Steagall Would Not Have Prevented The Housing Bubble/Collapse

Sorry, I could not come up with a shorter title.

The NY Times today and yesterday went down the path of bashing the "Too Big To Fail" banks on their Op-Ed page and the bashing came from both the Right (David Brooks) and the Middle (Joe Nocera).

Glass-Steagall ended the division of commercial banking and securities underwriting/trading.  The banks that took advantage of that were JPMorgan, Citibank and Bank of America, as well as some of the smaller regionals.  The securities firms did open some small banks for certain activities but they were not large deposit takers.

Well who exactly failed due to losses from securities on their balance sheet?  Bear Stearns, Lehman Brothers, Merrill Lynch,  AIG, Washington Mutual, Countrywide.  None of these had big global commercial banking and securities businesses.  OK, Citibank might have failed due to its parking too many securities on their balance sheet, but they could have done that without having the securities business.

How would keeping deposit taking and securities business separate have prevented the housing bubble from developing?  How would keeping them separate have prevented banks from parking too many AAA correlated securities on balance sheets?  The ending of Glass-Steagall had nothing to do with this blow-up and reinstating it would not prevent a financial crisis from happening again.

This housing crisis was caused by a failure to regulate the mortgage market and loan origination within quite a large number of financial firms, including but not limited to the firms listed above, the GSE's and any number of small mortgage origination firms that failed years ago and no one remembers.

When Lehman failed the financial markets stopped funding all the big financial firms.  The experience of this from history is why Central Banks have the Lender of Last Resort function as a core activity.  The U.S. government did exactly what it should have by providing funding to the financial system.  And the securities business profits have helped these institutions recover faster and pay back the taxpayer with amble profits for the government.

I don't understand why columnists who should be able to understand this fail to even try to educate the populist public.  Thankfully, both the Bush and Obama administrations have understood this and we have a basic core financial institution policy that serves the country well.