It has become an article of faith on the left that the 1999 Gramm-Leach-Bliley Act is to blame for the current crisis on Wall Street. Typical of the herd, George Polk Award winner Josh Marshall writes at Talking Points Memo:

Let me get this straight. John McCain’s top economic advisor, former Sen. Phil Gramm, is the guy who authored the deregulation law that most agree is the ultimate cause of today’s financial meltdown.

Click through if you wish, but do not expect any evidence to support the claim that “most agree” with Marshall, and do not expect any explanation as to why Gramm-Leach-Bliley is “the ultimate cause of today’s financial meltdown.” Marshall is only pushing the claim to hurt John McCain via Phil Gramm (fair enough during campaign season), but he is killing truth in the process.

First of all, Gramm-Leach-Bliley is hardly the momentus event the left makes it out to be. The 1933 Glass-Steagal Act that prohibited commercial banks from owning investment banks, and vice versa, had been steadily weakened since the 70s by an increasingly diverse and complex new financial reality. Waivers from regulators for merger became routine and the 1998 merger between Travelers and Citigroup functionally repealed the law. Gramm-Leach-Bliley only put a de jure stamp of approval on a de facto regulatory framework.

Second, the left has simply offered no explanation as to how the merging of commercial and investment banks caused the current crisis. In fact, the evidence so far shows that Gramm-Leach-Bliley has helped soften the blow to taxpayers by allowing commercial banks to take over trouble investment firms. Just look at which organization’s have failed:

  • Bear Stearns was an investment bank before it was sold to JP Morgan Chase (which includes a commercial bank).
  • Fannie Mae were Freddie Mac were government sponsored entities before the government bought them.
  • Lehman Brothers was an investment bank before it want bankrupt.
  • Merrill Lynch was an investment bank befor it was sold to Bank of America (which is a commercial bank).
  • AIG is an insurance company with no commercial banking division.

Remember, Glass-Steagal was passed to protect commercial banks from failure by forbidding them from investment bank practices like trading in securities and underwriting stocks and bonds. As you can see above non of the failed institutions are commercial banks that got in trouble through risky investment banking. Instead, it is the commercial banks that are providing some stability to the system by purchasing troubled investment banks. Without Gramm-Leach-Bliley they would not even be allowed to technically do this.

It is unfortunate that this crisis had to come along at the height of the silly season. On their more lucid days, people on the left like Josh Marshall do have a better respect for the truth than to push the utter falsehood that Graham-Leach-Bliley caused the mortgage meltdown. Hopefully after the election, no matter who wins, we can return to a civil, fact-based debate on how best to regulate financial markets.

Meagan McArdle and  Tyler Cowen have similar thoughts.