CHAPTER 2 “Please, God, not in my district”: Before the Economy Could Destroy Itself, First Paul Volcker Had to Save ItRead more at location 477
I noted that he sternly disapproved of moral hazard and had frowned on the Fed’s bailout of so many companies during the recent crisis. So I asked why it was okay then to bail out Continental Illinois in 1984. He said, “You’re always worried about the effects elsewhere. Continental Illinois was not the only bank in trouble at the time.”Read more at location 547
‘What this country needs to shake us up and give us a little discipline is a good bank failure. But please, God, not in my district.’” He smiled.Read more at location 551
It’s often said that the financial crisis was brought on by deregulation, such as the repeal of Glass-Steagall, the Depression-era law that split commercial banks from securities dealers. But this is an oversimplification. In the decades before the financial crisis, there was plenty of both regulation, such as increased capital requirements, and deregulation, such as the repeal of Glass-Steagall. Some deregulation, to be sure, was meant to better enable banks to compete. But regulators, in the process, thought they were correcting the flaws in earlier rules that made banks more fragile.Read more at location 565
Glass-Steagall, they thought, had caused the best-quality borrowers to issue bonds instead of takeout bank loans, leaving banks with the riskiest borrowers. Allowing banks to underwrite bonds and other securities would correct that flaw.Read more at location 569
Their efforts did make banks safer; but for the economy as a whole, safety was illusory because much of the risk had been pushed outside the banks, such as to mortgage companies like Countrywide Financial and off-balance-sheet investment funds.Read more at location 572
Yet the migration of risk to shadow banks began as a consequence of Volcker’s efforts to fix banks.Read more at location 577
