Thursday marks the 10-year anniversary of the passage of the repeal of the 1933 Glass-Steagall Act and related legislation. It is an anniversary worth noting for what it teaches us about forestalling financial crises, the consequences of maniacal deregulation and the out-of-control political power of the mega-financial institutions.
What lessons should be learned from the 10-year debacle?
First, Glass-Steagall’s key insight was in the need to treat regulation from an industry structure point of view. Glass-Steagall’s authors did not set out to establish a regulatory system to oversee companies that combined commercial banking and investment banking. They simply banned the combination of these enterprises. Cleaning up the current mess, we need strategies that focus on industry structure, as well as more traditional regulation.
Second, we need to return to Glass-Steagall’s more particular understanding: Depository institutions backed by federal insurance protection cannot be involved in the risky, speculative betting of the investment banking world. We need not just to reinstate Glass-Steagall, but to infuse its underlying principles throughout the financial regulatory scheme. Commercial banks should not be in the business of speculation. They have a job to do in providing credit to the real economy. They should do that. Their job is not to engage in betting on derivatives and other exotic financial instruments.
Third, giant financial institutions exercise too much political power, and for that reason alone must be broken up.
Fourth, we need broad reform in the area of money and politics. We need public financing of congressional elections, even stronger lobbyist reforms and tight restrictions to close the revolving door through which individuals spin as they travel between positions in government and industry.
Robert Weissman is president of Public Citizen.