Why Resurrecting Glass-Steagall is a Mistake
Guest Blog: Gloria Taylor
In a rare occurrence, Republicans and Democrats share some common ground in their respective political platforms this election cycle. Both call for restoring the 1933 Glass-Steagall Act that effectively separated commercial and investment banking in the response to the Great Depression.
At the time, the law’s champion, Senator Carter Glass, argued separating Wall Street investment banks from their commercial bank competitors would help reduce risky practices that he believed caused the financial crash in 1929. Ironically, prior to Glass-Steagall banks that engaged in both investment and commercial banking were actually less likely to fail than their exclusively focused counterparts. As it turns out, the separation of investment and commercial banking walled off large investment banks from their commercial bank competitors and failed to prevent the S&L crisis in the 1980s.
In 1999, Congress passed the Gramm-Leach-Bliley Act, which repealed two sections of Glass-Steagall and opened up the ability for banks and securities dealers, while still separate, to be affiliated with each other. Predictably, once the financial crash of 2008 occurred, many politicians and pundits blamed deregulation. But the Gramm-Leach-Bliley Act was not really federal deregulation and it did not cause the economic crash. In fact, from 2000-2007 federal financial regulators issued almost 800 separate rules, only seven of which were deregulatory, totaling more than 7,000 pages.
But rather than look at the evidence, Congress reacted to the Great Recession the same way the political class reacted to the Great Depression. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act was rushed through Congress to punish Wall Street and the big banks. And like Glass-Steagall, Dodd-Frank has protected large institutions from competition, resulting in fewer community banks, less choice for consumers, and higher costs.
Resurrecting Glass-Steagall now would repeat the same misguided approach to regulating the financial markets that occurred when it was first passed, and when Dodd-Frank was passed six years ago. Unfortunately, both political parties got it wrong this year. Congress should remove misguided federal regulations and stop bailing out failed institutions to encourage economic growth and long term market stability. Repeating the same mistakes of the past is the wrong approach.