The problem is that deregulation created a world where the disincentive to issue bad loans was removed.  Imagine the opposite, a world of hyper-tight regulation where every bank that issues a mortgage has to keep that loan on its books forever and ever, bearing the risk until satisfaction or default.  Banks would obviously be very very tight with their credit and would avoid risky loans at all costs.

Whereas in the actual, deregulated world, banks ended up carrying none of the risk themselves.  Instead, mortgages would be instantly bought up and securitized by investment banks such as Lehman.  As those bundled and securitized mortgages pass from hand to hand, people cease to know or care about the degree of risk represented by the underlying mortgages.  And if you're a bank, you don't care whether your loans are risky if there's an investment bank out there willing to instantly buy and securitize 95% of your loans without regard to risk, which is what was actually happening in many cases.

Lew convinced the WORLD investment community that the American homeowner was a damn good bet.

it was an honest statement, because there was a solid base of industrial jobs (paying - gasp - union wages), professional jobs (not being undercut by South Asian/Chinese proofreaders and paralegals and analysts working for 10% of US minimum wage), and actual regulatory checks and balances (making sure that people making crappy loans got run out of the business, rather than getting bonuses).  People could get a mortgage, and have some expectation of paying it back.  Now, everyone's a deadbeat living from paycheck to paycheck - they can be little else - given the way this country's been run into the crapper.

By 2007, the promises of the 1980s had all gone to hell, courtesy of Republicans like Phil "you're a whiner, not a winner" Gramm rewriting the banking and tax codes and promising more of the same when he's made McSame's economic czar, hedge funds turning everything financial into a more-crooked-than-Vegas-mob-run casino (and getting taxed at 15% rather than 30-something), and Village idiots who traded a little bit of campaign cash for a lot of private profits.

For years it has amazed me that the most profitable investment for a business owner or industry has not been in people, plant, innovation or product.  It has been in politicians.  The Return on Investment (amount of profit or advantage divided by the amount of campaign cash tossed to the pols) from buying politicians is simply astronomical - better than any legitimate business strategy could have yielded.

The corollary to that is that, in reality, the cheapest, most roundheeled whores in Washington did not work for Ms. Palfrey's escort service, nor on some seedy streetcorner along 14th street (or wherever the DC red-light district is these days) but rather for you and me, in their exalted offices on Capitol Hill.  Were the Congresscritters eceonomically rational or not just plain stupid, they would demand and get a much higher cut of the profits their changes to law and regulation facilitated.  

Of course, since it is not in corporate America's interest to disabuse them of their ineconomic folly, we continue to get the Steny Hoyers and Tom DeLays of this world running things.

And, of course, you also get heir-balls like Bushie coughed up to dance and distract and appoint sorta-responsible people.  And we get accurate commentary like this (from that link):

The major point appears to be that George W. Bush is not a serious presence in this most serious economic crisis since 1931. But if we take Bob Woodward's book seriously, he was scarcely a serious presence in many of the most important decisions with regard to Iraq, so why should things be different with regard to decisions about the economy. Would any serious person want George W. Bush to be a serious player, anymore than any serious person would want Sarah Palin to be "the Great Decider" with regard to dealing with economic crises?

ROBERT KUTTNER: Well, you know, some people have this picture of subprime lenders as these neighborhood predators. They were put in business by Citigroup. They were put in business by Merrill Lynch. They were put in business by the bluest chip names on Wall Street.

The prime enabler under Clinton of deregulation was Robert Rubin, Secretary of the Treasury. And Rubin comes out of Goldman Sachs, then he goes to work as one of Clinton's top guys. He presides over the repeal of the key piece of New Deal legislation designed to prevent conflicts of interest, the Glass-Steagall Act. And then he lets a short interval go by, and then he becomes chairman of the executive committee of Citigroup, which was only able to become the kind of conglomerate it did because of the repeal of the Glass-Steagall Act. Now, that's a flat-out conflict of interest.

And so, what should the big banks do? Well, they should hang their heads in shame. But they're not going to become converts to our view of the economy. We have to impose that on them as citizens through the democratic process of legislation and regulation. We have to fight the battle that we fought in the 1930s and onward and win it all over again, because, otherwise, if we don't, the power of speculative finance is going to just wreck the economy for the rest of us.

Frankly, Kuttner never explains HOW the repeal of Glass-Steagall led to the subprime mortgage crisis. So there really is not much of ana rgument there in my opinion.

From the Times:

Many employees toyed with their résumés in full view of colleagues. Others perused job-listing Web sites - Wharton's alumni page was popular - and compared notes about headhunters.

heh.

First and foremost, the repeal of the Glass-Steagall Act had nothing to do with it.

Aside from signaling the end of an era for Lehman Brothers and Merrill Lynch, this weekend's activity definitively drew a line at the end of another historical era: the Age of Glass-Steagall.

Paul Volker was an inflation hawk.....Raising interest rates now would be very hard on the economy.....But Volker may be the historical precedent....In the late 70s/early 80s, we had inflation because of the oil embargo....and also high unemployment....Volker raised interest rates driving the economy into a deep recession but taming inflation......With the current oil shocks, we could have stagflation again....

On a separate note but along the same lines, though, I do still worry some about deposit security.  For example, WaMu is pretty heavily involved in bad securities, and IIRC only about a third of their commercial banking deposits are federally insured.  So if they go belly-up overnight, well, who knows what happens.  Extremely unlikely, but then again this whole mess has been unlikely.

Glass-Steagall was replaced by Sarbanes-Oxley, which was supposed to increase transparency in the investment industry and corporate America at large. Instead, it allowed banks and investment houses to create new "vehicles," such as the packaging of mortgage loans into investments that were sold as soon as the loans were made. This prompted the mortgage industry to give out mortgage loans to all comers, whether they were qualified or not. This helps explain how mortgages in default now account for 9 percent of all American mortgages.

With Lehman, the question isn't who created MSBs, it's why were MSBs over-valued.  And THAT is due to subprime market which exists because of the repeal of Glass-Steagall.

Could this problem been solved without re-enacting Glass-Steagall?  Yes.

But with Glass-Steagal still in place it wouldn't have happened.

Without the subprime crisis no failure of Lehman.  Without the repeal of Glass-Steagall no subprime lenders, hence no crisis.

The houses were overpriced, especially in poor and middleclass communities!  And now, prices are going DOWN to what they should have been in the first place.  In the mean time, many people are paying mortgages higher than the actually value of the property.  Hence, the foreclosure frenzy.

Human beings need laws and regulation.  Without it, our natural inclination to greed and dominance takes over.  This is Bush's fault for presenting changes in the legislation regulating mortgage lending and I TOTALLY BLAME the U.S. Congress (the Dems especially) for allowing Bush to get away with so much.

It reminds me of an elaborate, albeit legal pyramid scheme.  And once the bottom is gone, the whole structure collapses.  

that's exactly what the whole sub-prime, mortgage-backed securities industry became. once that first card was pulled from the bottom, the rest of the stack collapsed.

BTD's correct, the repeal of G-S had nothing whatever to do with the current mess, a mess made possible by the oveweaning greed of the firms themselves, and the politicians (mostly republican) that have ennabled them for the past 8 years.