Sen. Carter GlassHistory says deregulation created instability. Glass-Steagall was implemented to correct market excesses in speculation with gimmicks. In recent times this Act was rescinded. We will have to live with the consequences.

Phil McDonnell counters:

Rarely is increased regulation good for the economy or the markets. Ordinarily we would be tempted to ask if our friend Ken has any source or statistics to put on the table to support the statement that deregulation causes instability. The converse of that proposition is that more regulation decreases stability.

The two Glass-Steagall acts were passed in the first half of 1932. So that year is the focal point. Here are the weekly standard deviations for the Dow industrials for 1931 and 1932.

year std
1931 5.6%
1932 7.1%

It looks to me as though the Dow volatility increased during passage of the bills and immediately thereafter. Certainly 1931 enjoyed lower volatility.

Charles Pennington replies:

I'm anti-regulation, in general, but I'm surprised Dr. McDonnell would put these stats up to make the case that regulation increases market volatility. Isn't it plausible that Glass-Steagall was passed in response to the higher market volatility, rather than the other way around, that the market volatility resulted from Glass-Steagall?
Anyway, here are root-mean-square monthly moves for 1931, 1932, and 1933:

1930 8.1
1931 14.1
1932 16.8
1933 14.1
1934 4.8

Ken would surely say that after volatility soared from 8.1 to 16.8 from 1930-32, the benevolent government officials took action, and their efforts resulted in the steep decline in volatility from 16.8 to 4.8 that occurred from 1932-34.


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