Ten years ago the financial world experienced a meltdown that brought on a Great Recession so devastating many Americans have still not fully recovered from it. Starting with the bankruptcy of Lehman Brothers on September 15, 2008—the largest bankruptcy filing in U.S. history—one financial institution after another collapsed, and with them went the global economy.
Rather than face any kind of punishment for the calamity their risky behavior caused, Wall Street institutions were instead bailed out to the tune of $700 billion in taxpayer dollars. The justification? These banks had supposedly become “too big to fail”—that is, that Wall Street institutions were so large, complex, and interconnected, that their failure would pose an unacceptable risk to the economy at large.
Whether or not you think that it was the right decision to bail out the banks, what’s clear is that we can’t allow it to happen again. The idea that our financial institutions are “too big to fail” is an indictment of the rules-or more correctly, the lack thereof– that allow them to grow so big in the first place.
One of those now-missing rules is the Glass-Steagall Act. That law, passed in 1933 in the wake of the bank failures and stock market crashes that led to the Great Depression, worked well for nearly a century before it was repealed. The law prohibited government-backed commercial banks from engaging in risky investment activity. By keeping banks and investments separate, Glass-Steagall not only insulated customers’ deposits from being gambled on risky investments, it helped keep financial institutions’ sizes smaller, thereby preventing them from becoming “too big to fail.”
Unfortunately, the law was repealed in 1999, bringing down the wall separating commercial banking and investing. This allowed the merger of the commercial bank Citicorp and the insurance company Travelers’ Group to go through to form the first post-Glass-Steagall banking conglomerate, Citigroup. More and more banks followed suit and within a decade, everyday Americans paid the price for the repeal of Glass-Steagall when the financial crisis brought about the most devastating economic calamity in decades.
Nowadays, even the founders of Citigroup, John Reed and Sanford Weill, have said that the repeal of Glass-Steagall was a mistake and that we need stronger rules for Wall Street. Reed has written that Glass-Steagall’s repeal caused a “culture clash” on Wall Street—suddenly, there was a collision of mindsets between that of commercial banking, which is typically more focused on long-term profits accrued through interest on loans, and investment, which is focused on engaging in risky speculative activity in pursuit of short-term profits.
Long story short, the investment culture won out, and the name of the game on Wall Street has been gambling with bank deposits ever since. Though the post-crisis Volcker Rule required by the Dodd-Frank Wall Street Reform and Consumer Protection Act put in place some prohibitions on investment trading by banks, the rule contained major loopholes and there is not nearly enough transparency about its implementation. Moreover, federal regulators are currently seeking to weaken the Volcker Rule. It’s time to take on Wall Street and reinstate the wall between commercial and investment banking.
There are many reasons banks should not be able to gamble with taxpayer-backed deposits. Not only could it lead to the sorts of bad investments that sparked the crisis a decade ago, it produces mega bank conglomerates that could again be considered “too big to fail.” Also, when banks use their deposits in this way, it means they’re not using their funds for the kinds of loans everyday people actually need, like mortgages or capital to start a business.
We must not forget the lessons learned from the crash ten years ago. Main Street Americans should not have to live in fear that our property values will plummet, our retirement savings will vanish, or our tax dollars will be used to bail out giant financial institutions. We need stronger, not weaker, rules on Wall Street.
Now is the time to band together to enact a new Glass-Steagall Act for the 21st Century and help prevent another Wall Street crash. Our new tool makes it easy to write a letter to the editor (LTE) to your local paper. By writing an LTE, you’ll be helping to raise your community’s awareness of the need for a new Glass-Steagall, focus more media attention on the issue, and put pressure on your elected officials to act. Together, we can make a difference!
Please take a minute to write an LTE to your local paper today to educate your community about the need for a 21st Century Glass-Steagall and call for your members of Congress to support legislation that would enact it.