Matthew C Klein, Columnist

What Glass-Steagall 2 Gets Wrong: Everything

Â Separating commercial and investment banks doesn't do anything to improve financial stability.

July 12, 2013 at 8:06 PM UTC

Matthew C. Klein writes for Bloomberg View about the economy and financial markets. He previously wrote for the Economist magazine and its economics blog, Free Exchange. Before that, Klein was a research associate at the Council on Foreign Relations, where he spent more than two years studying the history of the Federal Reserve and the intellectual history of monetary economics for an upcoming book by Sebastian Mallaby. He also worked at Bridgewater Associates, where he studied the economies of Central and Eastern Europe and advised institutional investors on asset-liability management. Klein has a bachelor's degree in history from Yale University. Originally from Chicago, he lives in New York.

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A new bill proposed by, among others, Senators John McCain and Elizabeth Warren, misses the point about what caused the financial crisis. The so-called Glass-Steagall 2 would do nothing to protect us from the devastation we recently experienced. Worse, it threatens to distract attention away from legitimate reform efforts.

There is a myth, popularized in part by inane television programs, that the 1933 decision to separate commercial banking and investment banking made the financial system safe and promoted decades of prosperity. According to this false narrative, the financial system was just fine until the government decided to repeal the Glass-Steagall Act of the early 1930s in 1999. This allegedly empowered unsavory securities dealers to gamble with customer deposits, or something.