Once upon a time there was a Great Depression. Businesses collapsed, a third of Americans were unemployed, one-time financial geniuses either grabbed a shovel and worked for a dollar a day or, more tragically, jumped from the high floors of skyscrapers.
To help ensure that we never messed up so badly again, Congress instituted the Glass-Steagall Act. It provided a wall between banks and brokerage houses. Brokerage houses sold more risky securities. Banks took a more safe route; they took deposits and loaned money, mostly to businesses. This was a good deal; the feds insured banks' deposits and rescued the rare bank that ran into financial trouble.
For decades this worked pretty well. There were rough patches in the economy, but the bank was always a safe place, whether it was a big bank, like Citibank, or a small bank, where the bankers went home at 4 p.m. But gradually, banks started to try to creep into the securities investments businesses. With the help of lobbyists and lawyers, banks were able to use octopus-like attached firms to sell securities. There were limits, though. Glass-Steagall still had a little power. If banks took a loss, they were responsible for the red ink.
But in 1999, Congress ended Glass-Steagall restrictions. It was heralded as a triumph of capitalism, an ability for financial institutions to become multi-service providers. Citibank became Citigroup, for example. Many of these banks eagerly embraced the new exotic mortgages that allowed people with no money to buy $250,000 homes. They also bought a lot of the weird derivatives created from these junk mortgages.
The result was inevitable -- a repeat of history so severe that only trillions of dollars in bailouts of our money averted a global depression. We agree with former Federal Reserve chairman Paul Volcker and Paul Reed, former head of the now-bankrupt Citigroup, that it's time to restore Glass-Steagall. Real, solid walls must be set up between banks and securities firms. We can't trust Wall Street to create a happy ending to this tale.
The end of Glass-Steagall and the financial insanity of banks recklessly -- remember Washington Mutual? -- destroyed the bedrock trust and confidence that depositers had in their banks. We need to restore that trust. Bring back Glass-Steagall. That will lead banks to a much-needed financial conservatism. And it will save the taxpayers a lot of bailout money over the years.
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