Justin Fox and Tyler Cowen say yes. Brad DeLong agrees. It was the repeal of Glass-Steagall -- and thus the demolition of the wall separating commercial and investment banks -- that "made it possible for JP Morgan to buy Bear Stearns and for Bank of America to buy Merrill Lynch. It's why Wachovia can consider a bid for Morgan Stanley." At the very least, the claim that repealing Glass-Steagall helped the clean-up seems convincing. But the counter-position is that the repeal helped get us into this mess. Thomas Kostigen makes a version of that argument here. By breaking the separation between banks and brokerages, and enmeshing the research divisions that could have called foul with the investment divisions that needed to move paper, forces that could have helped to "identify and isolate" the problems were dismantled. Transparency suffered. And the resulting situation is worse than it needed to be. My sense of the situation is that Glass-Steagall was not particularly relevant to this crisis (it was quite relevant to the dot-com bubble). Its repeal was part of a broader deregulatory trend through the 80s and 90s that did contribute to the financial meltdown. But the culprit here is the regulatory infrastructure that was never erected, that people like Phil Gramm dedicated their lives to battling. Toying with regulations first developed in the early 20th Century might have been a contributing factor, but the root problem was refusing to develop regulations for the financial sector as it existed in the 21st Century.
