Bring Back Glass-Steagall

by Thomas Frank

Last month, Sens. Maria Cantwell and John McCain proposed a measure that would revive parts of the old Glass-Steagall Act, the 1933 law that separated investment from commercial banking. After having been diluted many times over the years, Glass-Steagall was largely repealed in 1999, permitting a wave of consolidation in the financial industry.

The latest crisis has provoked a new debate over the old regulatory regime. Nobel laureate economist Joseph Stiglitz has argued that the repeal of Glass-Steagall had an "especial role" in making the financial calamity of 2008 possible. Former Fed Chairman Paul Volcker, currently the head of the President's Economic Recovery Advisory Board, has called for a new separation between commercial banking and riskier financial activities.

Any discussion about breaking up the financial industry, however, runs into a powerful stereotype: the overwhelming consensus belief in the risible backwardness of Glass-Steagall.