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Banking, Monetary Policy and the Political Economy of Financial Regulation

Banking, Monetary Policy and the Political Economy of Financial Regulation

Essays in the Tradition of Jane D'Arista

Edited by Gerald A. Epstein, Tom Schlesinger and Matías Vernengo

The many forces that led to the economic crisis of 2008 were in fact identified, analyzed and warned against for many years before the crisis by economist Jane D’Arista, among others. Now, writing in the tradition of D’Arista's extensive work, the internationally renowned contributors to this thought-provoking book discuss research carried out on various indicators of the crisis and illustrate how these perspectives can contribute to productive thinking on monetary and financial policies.

Chapter 6: Nurturing US securities firms: a century of public policy

Robert N. McCauley

Subjects: economics and finance, financial economics and regulation, political economy, politics and public policy, political economy


In rapid succession in March 2008, the Federal Reserve extended its securities lending facility to permit securities firms to exchange illiquid securities for Treasury securities, rescued Bear Stearns’ creditors and welcomed certain securities firms to something like its discount window. These may not be the last public policies adopted to sustain the US securities industry. But these moves were by no means the first. For almost a hundred years, law and practice favoured the development of securities markets and the evolution of a securities industry distinct from the banking system as a means to distribute government debt. This tilt did not start in the 1930s with the passage of Glass–Steagall Act separating the securities industry from commercial banking. Neither did the tilt disappear in the 1990s with the effective repeal of that Act. Bear Stearns’ tombstone, “born 1923, died 2008”, provides a better clue to the span of the public policy favouring the securities industry than does that of Glass–Steagall. This chapter reviews how public policy over the last nearly one hundred years nurtured the US securities industry. The approach is chronological. The next section considers how the Federal Reserve Act and early Federal Reserve operations sought to build up the securities market in New York at the expense of the established market in London and in the process nurtured independent securities firms.

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