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Left Wing Economist Galbraith Advocates Breaking the Law

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Posted on July 14 2010 7:00 pm
Norbert Michel is an Assistant Professor of Business Administration at Nicholls State University in Louisiana. Michel has a PhD in Financial Economics from the University of New Orleans, and he teaches statistics, economics, and finance courses. Visit Michel's blog at http://crimethinkerblog.blogspot.com/

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In The New Republic, James K. Galbraith blames the financial crisis on a breakdown in the rule of law.  He then goes on to enumerate the laws that allowed the crisis to take shape.  No, I’m not taking this story from a Beavis and Butthead episode.  Galbraith (and the Left in general) doesn’t really have a problem with bending the law, as long as it’s done his way.

Galbraith’s claim is that the repeal of the Glass-Steagall Act and the passage of the Commodities Futures Modernization Act of 2000 (CMA) allowed the “financial police” to ignore the warning signs that culminated in financial disaster.  Obviously, both of these actions were perfectly legal.  Galbraith’s real gripe is that government officials didn’t have enough control over people to prevent the meltdown.

Short of eliminating all risky behavior, though, no amount of control would prevent financial crises.  No matter how many times the Left repeats their favorite mantra, deregulation was not the cause of the crisis.  It was special interest politics and the expectation of being bailed out by the taxpayers.  For the record, both of these issues screw up capitalism – so don’t blame the free market.

The legislative acts were certainly legal, but is there any merit to Galbraith’s claims? Did these acts cause the crisis?  The 1999 repeal of the Glass-Steagall Act eliminated the line between investment banks and commercial banks.  The standard line of the Left is that this repeal allowed commercial banks to get into risky investment banking, thus spawning the crisis.

But let’s review a short timeline:

  • July 2007, Bear Stearns’ hedge fund collapses
  • March 2008, The Federal Reserve and JP Morgan Chase engineer a takeover of Bear Stearns
  • March 2008, The Fed announces investment banks can lend through the discount window
  • September 2008, The U.S. Treasury announces the bailout of Fannie and Freddie
  • September 2008, Lehman Brothers is allowed to fail
  • September 2008, Bank of America buys Merrill Lynch
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