When looking to lay blame for the 2008’s Great Recession, economists love to blame something that doesn’t exist anymore, the Glass-Steagall Act. Created in 1933 after the last major economic meltdown (AKA The Great Depression), this law was a big deal for two reasons:
1. the FDIC was created to prevent bank runs.
2. investment banks and commercial banks were unable to be a part of the same entity.
Everyone loves #1. Just imagine the awful feeling to find out a bank does not actually have the cash on hand to pay us our account balances.
#2 has lovers and haters.
Lovers: Commercial and investment banks serve different purposes, take on drastically different risks, and should not be combined.
Haters: The diversity of risk is a good thing. Commercial and investment banks should be united, so that risk is diversified to zero.
In 1999, the latter half of Glass – Steagall was repealed with Gramm-Leach-Bliley Act. Commercial and investment banks could reunite. Many feel the absence of Glass-Steagall contributed to commercial banks taking on risk like investment banks and instigated the complete collapse of the banking sector.
Here is The New York Times’s take on the Glass-Steagall Act.
Now that we know the history, I’ll connect Glass-Steagall to more recent events in the upcoming weeks.
Till next time!
(Originally published on Amanda Stanhaus’s financial literacy blog: XO, Bettie.)