The Glass-Steagall Act was implemented in in 1933 as a direct result of the stock market crash of 1929. To keep it really simple, the Act is designed to make sure the fox is not guarding the hen house. The hens are “we the people” and the foxes are the banks of all flavors.
The Act basically says that the foxes are allowed to pick off the hens, but only in their designated coups. So commercial banks need to stick with taking deposits and lending to businesses while investment banks can help companies raise capital and go public, but stay away from savings bank activities which should focus on savings accounts and home loans, etc.
The reason this made sense was that if you let investment banks get into the business of personal mortgages, they were sure to come up with a way to package, slice and dice these mortgages into an “investment banking” product and “SELL” them on the street, with lots of bad judgement and outright corruption in between. I mean that is what they do, so keep them away from mom and pop loans.
In 1999, the power was so consolidated and the profits too rich to ignore and the banks lobbied congress to repeal Glass Steagall. It took only 2 years to have the DOT.COM crisis and only another 7 years to really hit the fan with the Sub-Prime mortgage crisis.
There is virtually no argument (except by the banks) that the repeal of Glass-Steagall was a direct cause of the sub-prime crisis and the result is that we now have even bigger banks that are Too Bigger to Fail then before.
Could reinstating the Glass-Steagall Act help our current crisis? My answer is yes, but only if combined with a true commitment to disempower the banking cartels, dismantle the Too Big to Fail Banks, dismantle the Fed and take back the power ceded to big finance.
Do I think we have the political and social commitment to do this? NO.
Unfortunately, I believe that my guests on this show are more likely to be accurate on their assessment of the outcome of the current crisis.
Sorry for the bad news, but knowing this now can allow you to plan in such a way that you can hedge and be prepared instead of just hoping and praying that the government is going to bail us out on this one. There is such as thing as too little too late. The time to wake up is now.
Douglass S. Lodmell, J.D., LL.M.