The Glass-Steagall Banking Act of 1933 forced commercial and investment banks to separate. Commercial banks were not allowed to underwrite the sales of stocks and bonds, while investment banks could not take in deposits from customers. The law remained in place for half a century before it was repealed in 1999 through the Financial Services Modernisation Act, again better known by the names of the politicians who promoted the legislation – Gramm, Leach and Bliley.
What we need is a return to Glass-Steagall. I have not heard one government spokesperson say that the new proposed law will bring back Glass-Steagall. Apparently I am not alone. David Champion writing in the on-line Harvard Business Review, “But the evidence we have so far doesn’t really support the contention that this is Glass-Steagall redux. Nowhere have I seen a statement that banks will not be able to take positions in traded equities or equity derivatives or to do underwriting in equities, currencies, commodities, interest rates, or credit. The only businesses that they are clearly being precluded from are private equity and sponsoring hedge funds.”
So while President Obama talks about his new financial regulations there is no indication that the new law will prevent another panic and another bank bail out. The proposed new laws do not go far enough to control banking misbehavior.
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