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Indeed, we've witnessed the end of the era of the large investment bank, with the dramatic decision of the last two firms standing, Goldman Sachs and Morgan Stanley, to transform themselves into traditional bank holding companies. The investment-bank model of relying on short-term markets for funding was no longer workable. Instead, Goldman and Morgan will rely more on less risky sources of funding, as regular banks do. Would we really want a 1930s law saying, "No, sorry, you have to remain pure investment banks and go bust"?
The root of this crisis is subprime loans lavished on people who couldn't truly afford their homes. This bad debt was securitized -- i.e., chopped up -- and spread throughout the system as complicated financial instruments. Gramm makes an unlikely villain here, since he always opposed the rush to give marginal borrowers mortgages -- and took hell for it from left-wing activist groups -- and his deregulation didn't create securitization or other financial exotica.
It's the very word "deregulation" that galls Gramm's critics. In their simplistic morality play, anything promoting it must be to blame. But Fannie Mae and Freddie Mac were practically arms of the government ("government-sponsored enterprises") and still did more than any other institution to spread the bad debt before requiring a bailout themselves.
It's certainly possible to fault lax regulation. The Securities and Exchange Commission's 2004 decision to allow the investment banks to double their leverage looks foolhardy. But the mistakes and mania that created this crisis can't be attributed to one man. In other words, Barack Obama and every other Democrat should lay off their scapegoat of the hour.
Rich Lowry
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Rich Lowry is author of Legacy: Paying the Price for the Clinton Years .
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