Join the Fool as we assess blame for this financial meltdown -- March Madness bracket style! Below is the final matchup for ultimate blame. With your vote, you will declare the worst offender!
The case for Wall Street, by Morgan Housel
How ironic that as the masses are irked over the ever-growing role of government in our economy, many of the same people are furious with a group of political renegades who allowed free markets to reign.
But it's true: The repealers of the Glass-Steagall Act really, really screwed things up. Every time you think of the damage Citigroup (NYSE: C ) and Bank of America (NYSE: BAC ) continue to inflict on our economy, please, think of those lawmakers and clench your fists.
They should not, however, be targeted as more to blame than Wall Street itself. Ambition, instability, and most importantly greed flourished on Wall Street well before Glass-Steagall was canned a decade ago. The act's enforcement would not have prevented a tremendous amount of our financial fiasco.
For example, the shadow banking system -- nonbank lenders like Bear Stearns, Lehman Brothers, and the former incarnations of Goldman Sachs (NYSE: GS ) , and Morgan Stanley (NYSE: MS ) -- sits at the epicenter of the financial meltdown, yet resides largely outside of Glass-Steagall's reach. Such joys as 30-to-1 leverage, unfettered risk taking, and the threat of "too big to fail" could -- and did -- occur with Glass-Steagall in place. Anyone remember Long-Term Capital Management?
Besides, plenty of commercial banks collapsed without the investment banking units Glass-Steagall would have prevented. Look no further than the failures and absurd lending practices of Washington Mutual, Wachovia, or IndyMac. Many of these commercial banks were also pioneers of lending practices that fueled the housing boom. The machine of lax underwriting by standalone commercial banks securitized by the shadow banking system could have operated efficiently and legally with Glass-Steagall in place.
The repeal of Glass-Steagall did indeed add fuel to a roaring fire, but the fire itself was the greed, immorality, and stupidity of Wall Street.
The case for the repealers of the Glass-Steagall act, by Christopher Barker
When Shamu the killer whale performs, decked out in nature's tuxedo, the only threat to audience members is the soaking from a choreographed splash.
In the regulated aquarium environment, Shamu's predatory instincts are tamed into submission. In the wild, however, orcas are fierce and crafty predators, feasting mercilessly upon cute little seals and beloved dolphins. As deplorable as their behavior might be to the fans of charismatic sea mammals, we don't condemn the wild orca for being a killer whale.
The culture of greed that pervades Wall Street presents a similar conundrum. In boom times, greed is cheered as the engine of capitalism, and even touted in the mantras of oracles like Berkshire-Hathaway's (NYSE: BRK-A ) Warren Buffett. Now that we've gone bust once more, greed is again unfashionable, and regulatory controls like those set by Glass-Steagall after the prior depression are destined to return.
The sharks on Wall Street have committed outrageous acts, and they swim within a sea of shame, but the greater shame belongs to their would-be handlers. In removing the Glass-Steagall safety net, Congress betrayed its constituents, Alan Greenspan doomed his legacy, and lobbyists for companies like Citigroup and JPMorgan Chase (NYSE: JPM ) earned their keep.
By setting banks and brokerages free from the regulated swimming pool, the repealers of Glass-Steagall knowingly unleashed a swarm of killer whales into the ocean of global finance. Thomas Jefferson considered banks "more dangerous than standing armies," while Andrew Jackson called them "a den of vipers and thieves," so the nature of the beast has been well known for centuries. For ignoring that danger and permitting systemic risk to multiply in the shadows -- most notably through the $1 quadrillion global market for derivatives -- the repealers of Glass-Steagall unmistakably carry the greatest burden of blame for this ongoing crisis.
Check out the Fool’s entire 2009 March Madness bracket here.
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Who's More to Blame: Wall Street or the Repealers of the Glass-Steagall Act?