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A call for Glass-Steagall era banking

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One undercurrent of thought in this season of financial reform has been the notion that we'd all be better off if we returned to a previous regulatory era.

By that, many people mean that we'd be better off by returning to the days of Glass-Steagall. A recent commentary picks up on that, writing that "the system wasn't stabilized until the 1930s, when the government separated commercial banking from investment banking, tightened bank regulation and created deposit insurance. This system of rules virtually eliminated bank runs and bank failures for decades, but much of it was junked in a deregulatory process that culminated in 1999 with the repeal of the 1933 Glass-Steagall Act."

The commentary calls for the FDIC to insure all retail and wholesale deposits in return for laws that would strike many as naïve: Interest rate caps to thwart yield  chasers and laws that would limit commercial bankers to lending.

"These radical, 1930s-style measures may seem a pipe dream. But we now have the worst of all worlds: panics, followed by emergency interventions by central banks, and vague but implicit guarantees to lure back deposits."

In the end, what we're all really asking is whether the shadow system that has built up on top of the regulated banking system adds any value to our markets and economy. The answer is obviously yes, though there have been lots of excesses. The real issue is how to reform the system to main the benefits of modern markets without the excessive risks. That's proving difficult. That said, a return to the 1930s just isn't going to happen.

For more:
- here's the article

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