​Can We Stop The Big Banks, Or Is It Too Late?

It’s funny that a depression-era law has become a topic of discussion since the Democratic debate this week. I’ll give you a short summary, so you can see what you think about it.

During the Great Depression, the Glass-Steagall Act of 1932 and the 1933 Banking Act were passed by the United States Congress in order to keep banks from becoming investment firms. That’s a very broad summary, but it’s the gist of all the complex legislation.

As a result, banks were primarily depository institutions, until President Bill Clinton announced, as he was signing the Financial Modernization Bill on November 12, 1999, “It is true that the Glass-Steagall law is no longer appropriate to the economy in which we lived. It worked pretty well for the industrial economy, which was highly organized, much more centralized and much more nationalized than the one in which we operate today. But the world is very different.”

So, since the turn of the century, banks have dived into the deep waters of commercial investment transactions. If you’ve been following the news since the year 2000, you’ve undoubtedly noticed that banks have become far more powerful, investment firms have suffered, many have merged or closed, and the US economy has… well, I’ll just say it this way – CHANGED.

NowNPR.com is titled, “Fact Check: Did Glass-Steagall Act Cause the 2008 Financial Crisis?”

To summarize Zarolli:

“The biggest banks are a lot bigger than they once were, mostly because of mergers and acquisitions. What's not in dispute is that changes to Glass-Steagall allowed the biggest banks to grow bigger, which has raised new concerns about risks to the financial system…

“Democratic Sen. Elizabeth Warren of Massachusetts and Republican Sen. John McCain of Arizona teamed up to sponsor a bill that would bring back Glass-Steagall-type restrictions.

“It was never allowed to come up for a vote.

“The 1999 changes to Glass-Steagall led to much bigger banks, but that was, at best, just one factor in the 2008 financial crisis.”

I chose to share this quote because I agree with his conclusion, but I’m also cautious about the future of big banks that “create products” to sell me, rather than behaving as my trusted fiduciary partner.

To me, the way I feel doing business with my investment firmscompared to my banks is the difference between being a client and a customer. Even though banks always called their depositors “customers,” at least as far back as I can remember, there was a qualitative difference in the past.

Whether or not Clinton-era changes to Glass-Steagall contributed directly to the mortgage crisis, including the wave of residential foreclosures building up again now, is not really the issue.

What matters to me, and to the US economy, is knowing where we should we go from here. Reining in big banks is no longer an option for us, in my opinion. But they need to remember how to treat people, which, unfortunately, can’t be legislated.