The Return of Glass-Steagall
Mel Urofsky’s new biography of Louis Brandeis is a timely reminder of the Justice’s mantra about “the curse of bigness.” Following the Panic of 2008, there was much discussion about how to deal with financial institutions that are too big to fail. One possible solution is simple — make sure that no bank or related entity gets too big in the first place.
This week Congress took the first step down that road by introducing legislation that would restore the p Glass-Steagall Act of 1932. Glass-Steagall, inter alia, barred commercial banks from owning brokerages. For example, Bank of America could not own Merrill Lynch as it now does if the Act were in force. Glass-Steagall was repealed in 1999 by a bipartisan coalition and the repeal was signed by President Clinton.
While there were good arguments for this move at the time, that was almost certainly a mistake. After all, the banking system functioned pretty well from 1932 to 1999. Within just a few years of Glass-Steagall’s repeal, things went haywire. Correlation is not causation, of course. But I am hard-pressed to identify any public benefit that came from repealing the Act. We know it worked to reduce financial risk after the last great panic (1929). Why shouldn’t it be brought back now?