In the first 4 years of the Great Depression (1929-1933) more than 4,000 U.S. banks had closed permanently, that lead to $400 million losses for depositors and citizens of the U.S. It was due to a stock market bubble that finally collapsed in 1929 after years of reckless investments. These events led to the introduction of the necessary Banking Act of 1933 or Glass-Steagall Act. It introduced deposit insurance, backed up by the Fed, and also created a separation between commercial and investment banking.
However, in 1999 the Glass-Steagall Act was repealed in the interests of the big banks. “Oh, what a terrible mistake!” many said. And indeed, the world did not have to wait that long for another “Great Depression”.
Perversely incentivised loans were originated and sold to customers in the form of securities (Mortgage Backed Securities, Collateralized Debt Obligations and others). The bubble reached its highs by 2007 and collapsed in 2008, what lead to the World Financial Crisis 2008/09. There are many speculations about those who should be held responsible for such. It is clear we cannot accuse only the irresponsible borrowers, or the big banks, or even the hedge fund managers. But it is clear, that without a repeal of the Glass-Steagall act chances that the situation would have gone so much out of control would be significantly smaller.
In June 2009, the Obama administration proposed the Dodd-Frank Reform and Consumer Protection Act, known as “Dodd-Frank”, in order to prevent the events that lead to the Financial Crisis. Dodd-Frank came into law on 21st of July in 2010, establishing new institutions in order to monitor companies that can be categorised under “too big to fail”. However, many still believe that it is not enough and stricter regulations are a “must”. As Sens. Warren has stated:
“Despite the progress we have made since 2008, the biggest banks continue to threaten our economy”.
On July 7th 2015 Sens. Warren announced the introduction of the 21st Century Glass-Steagall Act, which would limit the type of financial companies that can be bailed out by taxpayers’ money. The new Glass-Steagall Act would rebuild the separating wall between commercial and investment banking, which was in place from 1933 till 1999.
After the reckless trials to repeal the Volcker Rule of the Dodd-Frank Act (that prohibits banks from proprietary trading and restricts commercial banks from investing in hedge funds and private equity), and deregulating the Wall Street, consumers can only hope that Sens. Warren will succeed with the introduction of the 21st century Glass-Steagall Act. The Global Financial Crisis showed us what a deregulated industry is capable of creating. Creating a monster, that is just “too big to fail”…