Glass-Steagall Act

Oh, those generous bankers of the ‘20s and ‘30s. They wanted to do soooo much for their clients. Loans for shipping contracts of supplies to Europe to help clean things up after the, uh...you know. Big banking deal advice for when U.S. Railroad wanted to buy B&O or Short Line or Pennsylvania or Reading (pronounced “redding”).

Big banks and even bigger fat guy bankers were…everywhere. And somehow, they all looked like the Monopoly guy. And all was good and nice and clean fun for white men…until it wasn’t. Part of what was discovered in the ashes of the post-Great Depression recovery era was that everything was…linked.

Interlocking Directorates.

Banks in cahoots with companies seeking to virtually or directly monopolize industries. Politicians in the back pockets of hugely powerful and generally unregulated banks. And yeah, people had huuuge pockets back then. Think: kangaroos.

Anyway, one of the laws that came out of that era was the separation of commercial banking services (like the people who simply lend debt money to large corporations) and investment banking services, like...the people who advise and facilitate mergers, acquisitions, and other strategic dealmaking.

The belief, or hope, was that, by separating these two, um…over-loving kids in the playground…the insider dealing...and fair resource allocating...and honest dealings of big industry would somehow be more…fair. Or at least open.

So the intent of Glass Steagall was all about fairness. In particular, it focused on the separation of commercial and investment banking. So that was that. These two types of banking were separated...and then the financial markets after 1935 were all smooth sailing, right?

Um, yeah, not so much. Glass Steagall came under assault from many angles, the biggest of which was from the big banks’ lobbying efforts, as they sought to grow...and one way to do that would be to again combine commercial and investment banking services.

So the lobby, along with fortunate (or unfortunate) timing…worked. And in 1998 Bill Clinton said, “I did not have sexual relations with that woman.” And, uh...he also repealed Glass Steagall. Ironically, his exact words were, “It was no longer appropriate.” And he was referring to “the” Act…not the one with Monica.

Anyway, it went away, and from ‘98 forward for a decade, banks merged and got bigger and more powerful. And then they got more aggressive. Loaned more money under pressure from shareholders to keep growing and delivering such loving returns. And then along came the mortgage crisis, which almost brought down the western world in 2008-ish.

A lot of long-haired profs actually blamed the unwinding of Glass Steagall as a root cause for this cataclysmic fail. The phrase “too big to fail” was bandied about. But what the phrase really meant was "too big to be allowed to fail."

Don’t worry though. Because now, with the banking system nicely regulated, we should all be in for a comfy, smooth ride for the foreseeable future...