“The repeal of Glass-Steagall did not cause the financial crisis.” This is a common claim made by conservatives in defense of doing absolutely nothing to fix our financial industry. And like much conservative wisdom, it is true enough to be dangerous. Glass-Steagall was the depression era law that stipulated two kinds of banks: commercial and investment. And never the twain shall meet. This had to do with FDIC, which insures deposits. The idea was that if the government was going to guarantee deposits, the banks were going to be careful with those deposits. Similarly, it was assumed that those investing with commercial banks were sophisticated investors who understood the risks. But in 1999, Glass-Steagall was repealed.
What makes this important is not that this repeal itself caused the financial crisis, because it most certainly did not. But the repeal allowed banks to get bigger. And since the crisis, those banks have only gotten bigger still. So the repeal of Glass-Steagall did exactly what those who first passed the law would have predicted. So we went from banks that were too big to fail to banks that are even bigger than too big to fail.
In a sane world, after 2008, all of these banking behemoths would have been broken up into little bite size chunks. But that brilliant man who many think “deserves” to be the next Federal Reserve chairman thought that was a bad idea. And we all know what buds Summers and the president are, so Summers ruled the day and the financial crisis led to us having an even more risky industry than we started with! Brilliant. Put that man in charge of the Fed!
Now, however, a bipartisan group of senators (bipartisan in the sense of Elizabeth Warren with two Democrats and McCain) have proposed reinstating Glass-Steagall. The banking industry, predictably, is against it. “It will make us less competitive!” The shocking thing is that such complaints are not openly mocked. No other industry would be allowed to make such claims. Dean Baker puts it well:
But because bankers are so powerful and as Baker puts it “own Washington” their competitiveness is our problem, just like it is our problem when they fail.
The best thing about reimplementing Glass-Steagall is that it would effectively do what our president was too weak kneed (and beholden) to do: break up the big banks. There is no doubt that this would not be enough, but it would be a start. And the fact that people are even talking about is a very good sign.