The emerging bid to restore the Glass-Steagall law has been gathering steam largely because many see it as a way to avoid future financial meltdowns. But this is a case where the supposed cure would not prevent the disease – and might very well cause unpleasant side effects.
The 1999 repeal of key sections of Glass-Steagall, which erected a wall between commercial banks and securities activities, is blamed by many for the 2008 financial collapse. But it is hard to see how. Not a single one of the biggest culprits in the financial meltdown – Lehman Brothers, Fannie Mae and Freddie Mac, AIG, Merrill or Bear Stearns – was the kind of financial hybrid that Glass-Steagall sought to prevent. Most of the problems that sprung up among financial institutions in 2008 were among pure-play institutions, primarily investment banks – whose bets weren't being backed by insured deposits.
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