Return of Glass-Steagall?

Five House Democrats will call this week for a return of the Glass-Steagall Act, which is a Depression-era law that separated Wall Street investment banking from Main Street commercial banking.

If adopted, the measure would give banks one year to choose between being commercial banks or investment banks. The nation's biggest, which are those now commonly referred to as "too big to fail," would be broken up. The Obama Administration opposes the measure. (Of course, what else is new.)

The amendment's five co-sponsors, all Democrats, are Maurice Hinchey of New York, John Conyers of Michigan, Peter DeFazio of Oregon, Jay Inslee of Washington, and John Tierney of Massachusetts. They want to restore the Glass-Steagall Act of 1933, which prohibited commercial banks from underwriting stocks and bonds. The act was repealed in 1999 at the urging of Larry Summers, now President Obama's chief economic adviser. (Of course, what else is new.) The five congressman all voted against the repeal in 1999.

Why is the return of this act important? Answer: Lending would shift primarily to productive investment. I believe the Glass-Steagall Act was one of the primary reasons for the growth of our economy after World War II. Lending went to finance productive assets (e.g. factories, machines, tractors, combines, etc), instead of financial speculation as it had in the 1920s.

It was that financial speculation that led to the asset bubbles in the 1920s, which resulted in the malinvestment that was responsible for the Depression. It was that very same financial speculation in the 1990s and 2000s that led to the real estate (bubble) malinvestment.