A Modest Proposal

You probably read recently where J.P. Morgan/Chase lost $2B in "investments." This has set off the usual cries for re-regulation of banks, which are already highly regulated. Most of this is politicians trying to get an even greater stranglehold on the banking industry to leverage it for campaign contributions. In the meantime, reinstating a regulation that really might make a difference is not getting much play.

The Glass-Steagall Act was passed by Congress in 1933 and it prohibited banks from getting in the investment business. Investment banking is a very different animal from retail banking. Investment bankers finance mergers and acquisitions, buy and sell commodities and currencies, think Gordon Gekko. They can profit handsomely (e.g. - Goldman Sachs) and they can go broke (i.e. - Lehman Bros.). Glass-Steagall was designed to firewall retail banking and the everyday deposits of millions of Americans from activities that could take down the bank if things went wrong. Glass-Steagall was repealed, however, by a bi-partisan majority in 1999 and in retrospect, this was a mistake.

If banks want to set up subsidiaries that operate without funds from the retail banking side and compete with the sharks - knock yourself out. Depositor accounts, whether individual or corporate, need to be insulated from the risks that haunt Wall Street. Obviously, banks love to have access to hordes of customer cash at little or no interest to make deals with, but when they hit it big, do they share the rewards with all the little guys who funded the transaction. Right. And when things go wrong? Well then it's off to Congress to get some cash to cover all the depositors. Glass-Steagall, or something very like it should be passed to stabilize the American banking system. If the banks want to play with their money, fine; but no longer should they be allowed to play with ours at will.

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