In a forthcoming paper, Patrick Bolton extends this view to look at bankers and at the Glass-Steagall Act, which forbade commercial banks from engaging in a wide variety of activities classified as “investment banking.”
Ever since the Gramm-Leach-Bliley Act of 1999 repealed Glass-Steagall, bankers have acted increasingly like feudal lords. The Dodd-Frank Act of 2010 introduced a measure somewhat similar to the Glass-Steagall prohibition by imposing the Volcker Rule, which bars proprietary trading by commercial banks, but much more could be done.
To many observers, Glass-Steagall made no sense. Why should banks not be allowed to engage in any business they want, at least as long as we have regulators to ensure that the activities do not jeopardize the entire financial infrastructure?
The main advantages of the original Glass-Steagall Act may have been more sociological than technical; changing the business culture and environment in subtle ways. By keeping the deal-making business separate, banks may have focused more on their core business.
Bolton and his colleagues seem to be right in many respects, though economic research has not yet permitted us to estimate the value to society of so many of our best and brightest making their careers in the currently popular kinds of “other finance.”
Speculative activities have plusses and minuses; much that is good and some that is bad. These are very difficult to quantify. We need to be very careful about regulations that impinge on such activities, but we should not shy away from making regulations once we have clarity.
Robert Shiller is a professor of economics at Yale University.
Copyright: Project Syndicate