Today, June 16, is the 85th anniversary of the signing of the Banking Act of 1933, otherwise known as the Glass Steagall Act.  When President Franklin Roosevelt signed Glass Steagall into law, he set off a 66 year epoch of relatively sound banking, during which time there was no big financial crash, as occurred in 1929 and again, after Glass Steagall's repeal, in 2008.  Under Glass Steagall, commercial depository banks were totally separated from investment banks.  Later, insurance companies were also cut off from any ties to commercial banks.  During the same wave of early New Deal legislation, the Federal Depositors Insurance Corporation (FDIC) was established, insuring commercial bank deposits and successfully deterring bank panics.

The repeal of Glass Steagall was a long-standing priority for Wall Street.  In 1984, JP Morgan Bank launched an internal study on how to repeal Glass Steagall.  That study, "Rethinking Glass Steagall," proposed a war of attrition against the principle of complete bank separation.  The war was launched in 1987, with the appointment of Alan Greenspan as the new Chairman of the Federal Reserve.  Greenspan had been a partner at JP Morgan and had chaired the study group which devised the war plan against Glass Steagall.  As Fed Chairman, Greenspan used his discretionary powers to increase the amount that commercial banks to lend to investment institutions.  By the mid-1990s, enforcement of Glass Steagall had eroded.  Citibank at that point moved to purchase both an investment bank and an insurance company, in violation of Glass Steagall restrictions.  That set the clock going to a two-year deadline.  Citi had to either divest of the purchases or Glass Steagall had to be repealed.  

Wall Street poured $300 million into a lobbying campaign to kill Glass Steagall.  In 1999, both Houses of Congress passed the Gramm Leach Bliley bill, killing Glass Steagall.   For the first time in 66 years, commercial banks could merge with investment banks and insurance companies.  It was only a matter of time before the investment banking divisions devoured the commercial bank deposits and directed them into a speculative binge beyond all previous financial bubbles.  When Lehman Brothers went under in 2008, the system crashedEnemies of Glass Steagall argued that Lehman Brothers was not a commercial bank and so the repeal of Glass Steagall had no causal relationship with the financial crisis.  Not so.  It was the repeal of Glass Steagall that allowed commercial banks to pour money into the gambling casino–including into Lehman BrothersAn article today in The Guardian by US correspondent Ganesh Sitaraman noted that there is renewed interest in Glass Steagall today–across the political spectrum.  He noted that progressive Democrats have been pushing reinstating of Glass Steagall for years.  It was included in the Republican Party platform in 2016.  That is just the tip of the iceberg.  There are bills to reinstate Glass Steagall in both Houses of Congress and they are bipartisan bills.  Even candidate Donald Trump called for the reinstatement of Glass Steagall, before he was gagged by Wall Street cabinet officials like Steven Mnuchin and Gary CohenThe IMF, the Bank for International Settlements, the Federal Reserve and Bloomberg News are all warning that we are headed for another major financial "correction" sometime soon.  They point to the consequences of a decade of post-2008 quantitative easing and zero interest rates, which led to a 63 percent jump in corporate bonds.  The median bond rating today is BBB- just one rung above junk bond status, and S&P Global estimates that more than 25 percent of all corporations can be categorized as "zombies" because the amount they must spend servicing their corporate debt is greater than their cash flow.

There is a growing consensus that we are again headed for a big financial shock.  Wouldn't it be wise to move to insulate the commercial banking sector from another fiasco before the next crisis?  Are the White House and Congress ready to act or are we heading blindly to a replay of 2008?  

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