In fact, in theory, the repeal of the Glass Steagall Act isn't such a bad idea.Why wouldn't we allow banks to perform the functions of investment banks? In fact, only banks are barred from performing other functions. Think about how many different industries General Electric is involved in. No one is demanding a bill to stop their cross over into nearly all industries.
To say that the repeal of Glass Steagall caused the financial crisis is simplistic. At most, it contributed to it. More than that, it wasn't the repeal of Glass Steagall per se. Rather, it was the lack of imagination that followed its repeal that contributed to it. Look at how enormous Citigroup got. Traveller's, Solomon Smith Barney, Primerica, the list is endless of the companies bought by then Citibank to turn itself into a behemoth. If someone was screaming about danger, their voice was muted. Yet, the danger was obvious. Citigroup had its hands in everything and their sheer size meant the company became too big to fail. Only no one called it that during the height of the boom. Instead, it became a beacon for all others to strive for. You could do everything, financially, at Citigroup. That was good. Citigroup had a major stake in every part of the financial world, and that was bad.
It wasn't Glass Steagall's repeal that caused that. It was the regulator's lack of imagination that caused it. All mergers are supposed to be scrutinized so that the new company doesn't create a trust. Well, effectively, Citigroup was a trust. So, in a perfect world, I'd want to keep Glass Steagall repealed and get better regulators. I'm in reality and we won't have better regulators.
According to Politico, there's a growing sentiment to reinstitute it.
The populist angst aimed at Wall Street banks is already spilling into Senate deliberations on regulatory reform, and a powerful new sentiment — big is bad — is being echoed by liberals and conservatives alike.
The anger at the nation’s financial behemoths is taking shape in a variety of ways, most notably in a bill from Sens. Maria Cantwell (D-Wash.) and John McCain (R-Ariz.), who are targeting big financial institutions such as JPMorgan Chase andCitigroup.
The bipartisan duo’s bill would reinstate the Depression-era law that built a wall between commercial banking and the riskier activities of investment banking. The separation — originally set up in the Glass-Steagall Act — was repealed in 1999.
On principle, I'm against this. I don't like government telling private business what business they can and can't engage in. If banks want to engage in mergers and acquisitions, let them. At the same time, I'm a huge believer in free markets. It's clear our regulators have no idea how to create free markets without Glass Steagall. Too big to fail is the antithesis of free markets.
Clearly, our regulators have no idea how to make free markets with financial services companies, so we can't have financial services companies. We need commercial banks and investment banks.
Of course, here we're also living a dream world. We can't simply unring the bell. We now have all sorts of financial services companies that will have to be split into commercial banks and investment banks. The same regulators that couldn't figure out how to keep them competitive in their current state will be in charge of keeping them functional after breaking them up.
The real problem is that big powerful banks have far too cozy a relationship with the politicos. That's what's lead to all of this. Glass Steagall was merely a tool. Though, if we were able to reinstate it, it would take away at least one tool of too big to fail.