As soon as the Great Crash hit, we were inundated with paid experts explaining to anyone who would listen that the repeal of Glass-Steagall did not cause the Great Crash. That went pretty well for the people who repealed Glass-Steagall, so now they started pushing the idea that Glass-Steagall would not have prevented banks from engaging in the activities that led to the Great Crash. We get a crash course from Andrew Ross Sorkin in the New York Times Dealbook, who begins by blaming the left for perpetuating the meme that repeal led to the Great Crash.

Sorkin argues that you can look at each failed entity and see that it was never covered by Glass-Steagall, like Lehman or Bear Stearns or AIG; and that for banks, which once were covered by Glass-Steagall, the problem came from the commercial side, in the form of bad mortgage loans. That superficiality is the hallmark of the defenders of Wall Street. So let’s try to look a bit deeper.

The most important impact of Glass-Steagall is that it reduced the number of openings for investment bankers. If commercial banks couldn’t have investment banking arms, they would not have needed to hire investment bankers. There would not have been the crushing need to make gigantic profits off those people. There would not have been the enormous pressure to find ways to make money, including cutting corners and outright fraud. And there would have been fewer people trying to make themselves insanely rich with other people’s money, and at no risk to their personal finances.

Just before Glass-Steagall was repealed, the financial sector had consolidated into a handful of giant commercial banks, and another group of giant investment banks. There were overlaps already. Investment banks operated money-market funds with checks, digging into the core deposit-taking business of commercial banks. Commercial banks had trust departments and owned small brokerage operations.

The key change was that investment banks had all gone public. While they were privately held, the owners want to get rich by means making large amounts of money and paying oneself from those profits. In public companies, the shareholders want to get rich, which means they want constantly increasing profits. That’s not so easy in the financial sector. There is a large but limited amount of trading of financial instruments, and there is money to be made in underwriting new securities, but the business is cyclical. Getting insanely rich requires a steady flow of new instruments to sell to the muppets.

The first of that flow of new instruments was junk dotcom stocks in the 90s. A great deal of money was redistributed to the financial sector, and some wound up financing the surviving businesses, and all of it came from small investors. As the 2000s wore on, the game was to find something new to sell to the mooches. The commercial banks saw the possibilities of asset-backed securities. After all, they were lending machines. The could crank up their loan operations, and use their investment banking arms to securitize and sell the resulting paper to muppets all around the world.

The investment banks competed by cutting deals with independent mortgage brokers, even buying them, and setting up their own securitization wings.

Suppose Glass-Steagall had been in effect and had been enforced during the period beginning in the 1990s. The banks might have stepped up their lending, but they would not have had large investment banking arms to package and sell those loans to muppets. Instead, they would have been forced to look to the investment banks for sales arms. In an Alan Greenspan world, or a world in which a not-captured SEC did actual enforcement, the investment banks would have paid attention to the assets behind the instruments they were selling. That would have meant a lot less predatory lending, and it would have meant that the process would have been slowed down so that the sellers could make sure that the loans were actually being transferred.

Equally important, the investment banks would have had legitimate sources of mortgage loans, namely, the commercial banks. Sure, there would have been independent mortgage brokers, but they would have to compete for securitization sales with big commercial banks. The commercial banks had a big edge here: the independent mortgage brokers were thinly capitalized, and depended on commercial banks for the loans that enabled them to grow. The commercial banks could control the amount of money going to mortgages simply by reducing or increasing their loans to their competition. We can assume that they would do so to maximize their own profits.

Guessing at a future with Glass-Steagall in effect is, of course, creating a fantasy world. No one can say that Glass-Steagall would have prevented a housing bubble, given the level of greed among bankers, and given the enormous amount of cash sloshing around the world looking for safe returns. But it’s equally certain that Sorkin is wrong to say it would not have stopped the Great Crash; he doesn’t know any more than I do. But I’m pretty sure we agree that the Great Crash would have been a lesser crash had Glass-Steagall been in effect.