Misremembering Glass-Steagall, for fun and political profit, again

Hillary Clinton’s first big economic speech of the 2016 campaign was interrupted yesterday by a refrain that is all-too-familiar to those inhabiting the world of financial regulation: “Senator Clinton, will you restore Glass-Steagall?” Not surprisingly, the shouter of these words was an organizer with LaRouchePAC, the fringe political group that has made its top priority the restoration of the Depression-era banking law, which separated commercial banking (taking deposits and making loans) from investment banking (arranging securities offerings and mergers, among many other functions). The disciples of Lyndon LaRouche (whose charming incoherence sometimes masks their deeply hateful underlying worldview) have invested Glass-Steagall with almost messianic importance, and ever since the financial crisis in 2008 they have been proselytizing very loudly on behalf of their supposed savior.

These days the LaRouchies have some distinguished company in calling for Glass-Steagall’s second coming. For the second consecutive Congress, Senators Elizabeth Warren (D-MA), John McCain (R-AZ), Angus King (I-ME), and Maria Cantwell (D-WA) have introduced legislation to reimpose the so-called “wall of separation” between commercial and investment banking operations. And on the presidential campaign trail, Martin O’Malley has sought to position himself as “the Glass-Steagall candidate.” All of these politicians have embraced the idea that the irresponsible repeal of Glass-Steagall by the deregulatory Financial Services Modernization Act of 1999 (AKA Gramm-Leach-Bliley) was a major contributor to the 2008 financial crisis, and that reinstating Glass-Stegall could be a big help in reducing the threat of future crises.

The only problem with this narrative, which enticingly provides some clear villains in bringing about the financial crisis, is that it is almost completely without merit. Its history is shallow to the point of being incorrect; its choice of villains is laughable; and it fundamentally misrepresents the role Glass-Steagall actually played in the latter decades of its existence, as well as what the Gramm-Leach-Bliley Act really changed in 1999. It would be an exaggeration to say that there is nothing to recommend restoration as a policy prescription, but it is nevertheless fair to say that calls to restore Glass-Steagall are an obnoxious distraction from more carefully targeted reform proposals.

All of this was very much the case the last time Glass-Steagall revanchists had a mini-moment, back in 2012, when I published a Brookings White Paper, “Moving Beyond Calls for a New Glass-Steagall.” For those interested in a deeper dive into the history, I’ve also published a scholarly look at Glass-Steagall’s development, “Competing Institutional Perspectives in the Life of Glass–Steagall” (gated).

I won’t summarize those papers here, but here’s the takeaway: efforts to bring back Glass-Steagall are exercises in nostalgia that distract from financial reform ideas more apposite in the 21st century. Nobody laments the passage of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which had just as much to do with creating our contemporary financial landscape as the gradual demise of Glass-Steagall did. A large number of voters apparently like the ring of Glass-Steagall, making it rhetorically attractive to campaigning politicians, but if their goal is actually good policymaking, we should look elsewhere.