NYT: What Is Glass-Steagall? The 82-Year-Old Banking Law That Stirred the Debate
What Is Glass-Steagall? The 82-Year-Old Banking Law That Stirred the Debate
Neil Irwin
New York Times
In the depths of the Great Depression, a widespread view was that the nation’s ills stemmed from these two types of banking having become intertwined. Problems on Wall Street rippled through the financial system to cause ordinary depositors to lose money and ordinary bank lending to dry up.
The government’s response was the Banking Act of 1933, commonly known as the Glass-Steagall Act (for the bill’s sponsors, Senator Carter Glass of Virginia and Representative Henry Steagall of Alabama), which required that commercial banking and securities activities be separated, not to take place within the same financial institution.
Bankers and many regulators argued that the risks Glass-Steagall aimed to guard against were overstated (and indeed regulators began allowing activity that violated the spirit of the law well before it was formally repealed). In 1999, Congress passed and Bill Clinton signed the Gramm-Leach-Bliley Act, overturning Glass-Steagall.
In other words, the mega-banks that were enabled by Glass-Steagall repeal were certainly among the firms that caused the crisis, and did require bailouts. It is less clear that they were meaningfully more culpable than companies whose structure had nothing to do with the Glass-Steagall repeal, or that the existence of both commercial banking and investment banking under the same corporate entity was a primary reason they got into trouble.
The stronger arguments for Glass-Steagall repeal as a cause of the crisis are also subtler ones. The investment manager Barry Ritholtz, for example, has argued that “the repeal of Glass-Steagall may not have caused the crisis — but its repeal was a factor that made it much worse” by allowing the mid-2000s credit bubble to inflate larger than it otherwise would have and making banks more complex and thus prone to failure.
In other words, the debate over Glass-Steagall reinstatement can be viewed as less about the gritty details of exactly what business lines Citigroup and JPMorgan should be allowed to engage in, and more about the general thrust of how aggressively to regulate Wall Street.
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