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Reinstating Glass-Steagall Is a Really, Really Bad Idea

Having Glass-Steagall in place would not have prevented the last financial crisis. But reinstating it might make the next one even worse.

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In an effort to prevent a recurrence of the 2008 financial crisis, a group of senators, including John McCain, R-Ariz., and Elizabeth Warren, D-Mass., has introduced legislation to reinstate the Glass-Steagall Act, which enforced a division between commercial and investment banking. Despite the presumably good intentions of the bill's authors, Congress should reject their initiative. If this bill became law, it would do nothing to prevent another financial meltdown--and, in fact, it might make the next banking crisis even worse than the last one.

In some circles a myth has arisen: That the 1999 repeal of parts of the Glass-Steagall Act led inexorably to the 2008 financial disaster. Politicians like Rep. Walter Jones, R-N.C., often make the case that this repeal legislation, the Gramm-Leach-Bliley Act, allowed banks to "gamble with their depositors' money." In a blog post called "Let's Get Real," Sen. Warren clearly implies that if Glass-Steagall had been in place, the 2008 financial crisis would not have occurred. If true, these charges would be a damning critique of Glass-Steagall's repeal.

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Scott Cooley does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.