Never let an Economist use "Unintended Consequences" Again

by Ken Houghton

It’s not been a Good Weekend for me to read Berkeley-based Economists. (Though DeLong is on fire, in a good way, and has been since that initial post.)

Via Mark Thoma, this from Barry Eichengreen:

In the United States, there were two key decisions. The first, in the 1970’s, deregulated commissions paid to stockbrokers. The second, in the 1990’s, removed the Glass-Steagall Act’s restrictions on mixing commercial and investment banking. In the days of fixed commissions, investment banks could make a comfortable living booking stock trades. Deregulation meant competition and thinner margins. Elimination of Glass-Steagall then allowed commercial banks to encroach on the investment banks’ other traditional preserves.

In response, investment banks branched into new businesses like originating and distributing complex derivative securities. They borrowed money and put it to work to sustain their profitability. This gave rise to the first causes of the crisis: the originate-and-distribute model of securitization and the extensive use of leverage.

It is important to note that these were unintended consequences of basically sensible policy decisions.

Consequences? Yes. Unintended??? Not a chance in the world.

Now that the final step has been taken, can anyone deny that Phil Gramm, Jim Leach, and Tom Bliley knew exactly what they were doing?

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