The Return of Glass-Steagall

With both major party platforms calling for a return to some version of Glass-Steagall, it was a given that, whoever won the Presidential election, the issue would return to the public debate. However, we still need to do considerable work ending bailouts, and a return to Glass-Steagall would most likely divert us from that goal.

In order to help clarify this debate, the Cato Institute is proud to today offer a new paper on the topic, The Repeal of the Glass-Steagall Act: Myth and Reality by Oonagh McDonald, CBE. Dr. McDonald is an international financial regulatory expert, having held senior positions in several U.K. financial regulatory agencies. She was also a member of the British Parliament from 1976–87. Her most recent book details the failure of Lehman Brothers.

The new paper lays out a legislative history of Glass-Steagall, pointing out that of the provisions relating to the separation of commercial and investment banking (sections 16, 20, 21, and 32) only two of those four (sections 20 and 32) were repealed in 1999 by the Gramm-Leach-Bliley Act. Two remain current law today. Dr. McDonald further demonstrates how the two repealed provisions had already been largely eliminated by court and regulatory decisions long before 1999.

Dr. McDonald also reviews the economic literature, concluding that Glass-Steagall was not even the appropriate response to the banking problems of the 1920s and 1930s in the first place. What’s more, had Glass-Steagall remained fully in force after 1999, the financial crisis of 2008 would have largely looked the same. As I’ve written elsewhere, Glass-Steagall has essentially become a symbolic lens—a “Rorschach Test” that reflects one’s views on the power of big banks. However, if we truly wish to end bailouts, we need to get the history, law and economics right. Dr. McDonald’s paper makes an important contribution in that direction.