Glass-Steagall, the Sequel?

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Is it time for U.S. to consider going back to the future and bringing back some Great Depression-era regulation to help fix the current economic mess? As Floyd Norris points out, Thursday’s slide in the Dow Jones Industrial Average and Standard & Poor’s 500 stock index means today’s markets have fallen as far as in the first few years of the Great Depression. And the job losses “from this recession are now worse than in 1981-1982, which is generally considered to have been the most severe economic downturn in the U.S. since the Great Depression,” writes Justin Fox. So is it time for the government to consider bringing back Glass-Steagall? That piece of Great Depression regulation separated commercial banks from investment banks. Congress repealed it in 1999 so Citicorp and Travelers could get together. Paul Volcker, who heads President Barack Obama’s Economic Recovery Advisory Board, thinks instituting something similar to the separations created under Glass-Steagall might not be such a bad idea, Bloomberg reports. Volcker wants to create a two-tiered banking system. On one tier would be commercial banks, which provide customers with depository services and access to credit and would be highly regulated. On the other would be securities firms, which would have the freedom to take on more risk and practice trading, “relatively free of regulation.” There is at least one difference, in volcker’s plan commercial banks would be able do stock-and-bond underwriting and provide merger advice.

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