On Monday, Hillary Clinton gave the first big economic policy speech of her 2016 campaign. Toward the end of it, an audience member interrupted her, asking, “Senator Clinton, will you restore Glass-Steagall?”
In a campaign season already dominated by candidates’ pursuit of Wall Street donations, how to regulate the banking sector remains one of the most pressing issues facing the country. Seven years after the financial crisis of 2008, the “too big to fail” banks are bigger than ever, while the community banks that make the lion’s share of loans to local entrepreneurs and meet other productive needs are disappearing.
The question that Clinton got on Monday cuts to the center of the debate. In the ongoing push to make our financial system one with less risk, and one that works for more Americans, there’s one policy that we know is effective. It’s the Glass-Steagall Act, a banking reform law passed in 1933, as lawmakers were grappling with the destructive banking activities that caused the Great Depression.
Unlike rules about trading derivatives or risk-weighted capital ratios—rules that, in their complexity, create loopholes for big banks’ fleets of lawyers to exploit—Glass-Steagall, in the course of a mere 37 pages, laid out a series of common-sense reforms. The most central of these was a requirement that investment banks, those that trade securities, be separate from commercial banks, those that accept deposits. In other words, banks swapping subprime mortgage loans couldn’t fund those swaps with a person’s federally-insured life’s savings.