Last month, a bipartisan group of senators introduced legislation that would re-establish the Glass-Steagall Act, once again separating commercial and investment banks. Leading the fight is Sen. Elizabeth Warren, D-Mass., who argues the act, which was created following the Great Depression to safeguard federally insured bank deposits from being used for high-risk investment banking, must be reinstated to protect our financial system and taxpayer money.
But this ain't 1933, people -- during the Depression, when banks failed left and right, there was no government assistance to stop the bleeding. When depositors' money was gone, it was gone -- there was no FDIC to back it up.
Today, when we find ourselves in the midst of a financial crisis, the president simply signs a blank check and taxpayers foot the bill. A finger is wagged at big banks, and we all complain that something must be done. But eventually, we carry on, business as usual. There's no sense of urgency to re-establish Glass-Steagall as there was when it was first devised and our banking industry has become too complicated (some would say too corrupt) for the implementation of a 21st century Glass-Steagall to be realistic.
What Is Glass-Steagall?
These provisions accomplished a number of things, but most notably prohibited commercial banks from participating in investment banking; this includes activities such as underwriting securities (except for certain treasuries), providing services by brokers or dealers in transactions in the secondary market, as well as facilitating mergers, acquisitions and other forms of restructuring. Investment banks were likewise prohibited from accepting deposits.
However, with time, the Great Depression became just another chapter in history books while laws surrounding Glass-Steagall became increasingly open to interpretation. Major banks continued to push for the repeal of the act until finally, in 1999, they got their way. The Gramm-Leach-Blilely Act, passed under the Clinton administration, broke down the remaining barriers between investment and commercial banks that Glass-Steagall had put up.
Too Big to Fail = Too Complicated to Split Up
Further, in the 14 years since Glass-Steagall was repealed, functions within the banking system have become exponentially more complicated and interdependent. Separating them would be incredibly messy and expensive (exactly how expensive is one detail that has yet to have been shared by supporters).
That doesn't mean Warren's efforts are futile, however. The point is that we're talking about bank regulation. As Linette Lopez of Business Insider explained, "It doesn't matter if the Chicago White Sox win the World Series or we put a man on Mars, Warren is going to want to talk about bank regulation. ... The point was, and still is, keeping banks, what they do and how they do it, on the tip of the national tongue."
Banking is inherently risky. Establishing the Glass-Steagall Act did not prevent a financial crisis from happening and its repeal did not cause the meltdown in 2008. Had Glass-Steagall been in place during that time, the crisis perhaps wouldn't have reached the magnitude it did, but to think that this set of provisions could fix everything that's wrong with our financial system today is foolish.
And Elizabeth Warren knows that too.
"There is no single magic bullet to stop 'too big to fail,'" she said in a CNBC interview. "But the central premise behind a 21st century Glass-Steagall is to say, 'If you want to get out there and take risks, go and do it. But what you can't do is you can't get access to FDIC-insured deposits when you do.'"
Reinstating the act wouldn't instantly fix everything that's wrong with our system, but it sure would be a much-needed start -- just don't count on it ever happening.