Republicans and Democrats both want to bring back the Glass-Steagall law that separated commercial and investment banking. The idea is based on the belief that the partial repeal of the law in 1999 is to blame for the 2008 financial crisis. But that belief is mistaken, as Oonagh McDonald explains: “[T]he 2008 financial crisis had precious little to do with Glass-Steagall, one way or the other. It was caused primarily by bad lending policies, which in turn led to the growth of the subprime market to an extent that neither the lawmakers nor regulatory authorities recognized at the time. The commercial banks and parent holding companies that failed—or had to be sold to other viable financial institutions—did so because underwriting standards were abandoned. […] Yet by focusing the public’s anger on “greed,” “overpaid bankers,” and so-called “casino banking,” politicians have been able to divert attention from the ultimate cause of the financial crisis, namely their belief that affordable housing can be provided by encouraging—or even obliging—banks to advance mortgages to homebuyers with low to very low incomes and requiring government-sponsored enterprises to purchase an ever-increasing proportion of such loans from lenders.
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