Thread by @GeorgeSelgin

Some comments on @STOmarova's 2009 "Quiet Metamorphosis" article, which Morgan quite rightly encouraged me to read.

https://twitter.com/MorganRicks1/status/1443402169718386692

Having been among the critics of the controversial proposals Saule makes in "The People's Leger," I'm glad to be able to compliment her on this paper telling the story, in very great detail, of the OCC's also rather radical broadening of national banks' legal undertakings.

Through a series of revisions of its interpretation of "the business of banking," the OCC dramatically expanded the list of derivatives national banks could deal in, with each step serving as the basis for justifying yet another, and a sort-of positive feedback loop.

This continued to the point where practically the only restrictions remaining are those concerning securities dealings still expressly prohibited under the Glass Steagall Act--yes, _that_ Glass Steagall, rumors of the death of which have been wildly exaggerated!

In fact, the OCC's gradual re-interpretation of the "business of banking" was far more important in expanding national banks' nontraditional activities than the 1999 Gramm-Leach-Bliley Glass-Steagall "rollback" of 1999, to which far too much attention is given.

(On the minor relevance of GLB in the 2008 crisis see cato.org/policy-analysi….)

Indeed, as Omarava reports, James Leach was himself "outraged" by the OCC's ultimately succsessful successful effort to, in effect, "roll back" Glass-Steagall much further that GLB did.

So, some very valuable history. Still, the paper does inspire some critical remarks. The first concerns the relation between it and "The People's Ledger." Taken together, the papers amount to a still stronger proposal for "ending banking as we know it."

That's so because in "Metamorphosis," Omarova targets the OCC's "transformation of the U.S. commercial banks from traditionally conservative deposit-taking and lending businesses." From it it is clear that she thinks banks should be confined to their traditional business.

Yet it is precisely that traditional banking business that Omarova targets in "People's Ledger, where makes the case for having the Fed take over all deposit taking, and (by implication), all the lending that goes with it.

If banks both confined to their traditional business _and_ prevented from engaging in that business, that doesn't leave them much to do! That's not just ending banking as we know it: it is ending it tout court!

My other major criticism of "Metamorphosis" is that, although it clearly implies that the OCC's shenanigans were an important cause of the global financial crisis, it offers no proof. Nor, I think, could it.

According to a careful ECB study, most GFC bank failures were caused by defaults on home mortgage and commercial real estate loans and losses on bank agency MBS holdings. ecb.europa.eu/pub/pdf/scpwps…

Some very large banks also suffered major losses on private-label MBS that securitized subprime loans. But all of these bad investments would have authorized even under the OCC's original, and quite conservative, "look through" interpretation of "the business of banking."

According to that interpretation, which Omarova herself calls "difficult to argue with," "if banks were permitted to invest or trade in the underlying asset, they were permitted to trade in the original derivative instrument."

So while one may well question a legal arrangement that has granted the OCC so much discretion in decision what constitutes "the banking business," it's not obvious to me that the "metamorphosis" of banking that this arrangement has allowed has been all that detrimental. (End.)

Att'n: @MorganRicks1 @LevMenand @ProfKateJudge @norbertjmichel @VernMcKinley @VinceGW @DanAwrey @ZaringDavid @CParaSkinner @DanEricRohde @MehrsaBaradaran @adam_tooze

Sorry: "Ledger"