Glass-Steagall in Our Future: How Straight, How Narrow

A dozen years ago, Randall Kroszner, soon to be one of George W. Bush’s economic advisors and a Governor of the Federal Reserve, could comment in a Levy Institute seminar, without fear of contradiction, that there was no evidence to back the "public interest rationale" for the separation of commercial and investment banking. Except for deposit insurance (and even here, there were mutterings about moral hazard), the limits imposed on banking by the Glass-Steagall Act of 1933 were roundly condemned through the entire cadre of academic and corporate economists, as the old law was unceremoniously junked 66 years later. A few of us did worry about the loss of information that could result as the veil of bank secrecy was extended over additional transactions, but we were not really respectable. Today, we few stand on the high ground of observed recent experience and watch the survivors of the still-acclaimed wave of financial innovation struggle defensively, if not repentantly, up the slopes of what Alan Greenspan called "shocked disbelief." Ten years after its repeal, Glass-Steagall has a constituency again.