Obama’s Glass Steagall 2.0: Separate Trading From Traditional Banking. Easy Right?

Bank stocks are taking the rest of the market down with them today following Obama’s bank regulation proposal announcement. He calls for an end to government backing for banks that engage in proprietary trading. His proposal would have to be approved by congress. Earlier today, Mike Konczal at NewDeal2.0 wrote a piece about the likely return of something similar to Glass Steagall, Depression era regulation (that lasted until 1999 when Gramm Leach Bliley Act repealed it) which separated traditional banking activities from investment banking activities. His post touches on many points Obama discussed and that we’ve raised recently about how Glass Steagall is a useful regulation but it needs a current-era upgrade.

The challenge is that in a global era, you can’t just say that big banks can’t do any securities related activity because their corporate clients—the same corporate clients that also use those banks for traditional banking activities—demand the securities services from banks too. To force big bank clients to use separate firms for integrated activities is an anti-capitalist trap for politicians. At the core of this issue is what securities activities should be allowed and which should be banned. Proprietary trading is the one that most agree should be banned because government can justify using taxpayer funds to back traditional “savings and loan” banking activities, but it’s much harder to make a case that taxpayers should bail out a bank if their trading agenda goes sour. It’s fairly simple, especially after Obama officially proposed this approach today that Paul Volcker has been pushing for. But as with any lawmaking process, congressmen and the lobbyists who drive their decisions always complicate matters.