Restoring Glass-Steagall

Our Sen. Maria Cantwell wants to bring back the Glass-Steagall act, the 1933 law that prevents investment banks from merging with retail banks. The law was repealed in 1999 under Bill Clinton and the Republican Congress and created such “too big to fail” behemoths as Citicorp.

In general, I like the idea of big, simple regulations as opposed to complex ones as a way to regulate Wall Street. Government is never going to out-smart the financial engineers, so it’s probably better to keep the laws simple and dumb. For example, until the 1980s, interstate banking was largely prohibited. This is kind of silly, if you think about it in a modern context, but at the same time it ensured that no bank became “too big to fail.”

So I’m sympathetic to Cantwell’s approach. Even if you don’t think that the repeal of Glass-Steagall caused the crisis (and I’m not sure it did), this kind of regulation is worth pursuing.

That said, I have a hard time seeing it actually passing. Back in 2008, when the financial world was crashing, the feds engineered a series of shotgun marriages between investment banks (which had lots of sub-prime exposure) and commercial banks (which had large stashes of customer deposits and could better weather the storm). Bank of America buying Merrill Lynch is one example.

Given all the work that was done to arrange these marriages (and the fact that they probably only could have happened in the absence of Glass-Steagall), I have a hard time seeing how Cantwell’s bill becomes a law.