Elizabeth Warren and John McCain aren’t usually on the same side of a policy debate in Washington. But the freshman Democratic senator from Massachusetts and the veteran Republican lawmaker from Arizona do agree that banking should be simpler and safer.
With the financial crisis of 2008 and taxpayer bailouts for banks deemed “too big to fail” in mind, Warren and McCain are working to separate ordinary banks from riskier investment banks.
At Consumers Union, the policy and advocacy arm of Consumer Reports, we think that’s a good idea. Here’s why: An ordinary bank holds your checking and savings accounts, and its deposits are federally insured. Investment banks engage in speculative trading and other gambles on Wall Street. We don’t think investment banks should be gambling with insured deposits and other taxpayer-backed advantages.
There was a time when the law didn’t allow banks to mingle their routine commercial business with their investment banking functions. The financial collapse that set off the Great Depression led Congress to erect a firewall between the two.
That law was called the Banking Act of 1933, also known as the Glass-Steagall Act. For nearly the next 50 years, the U.S. banking system was stable. But starting in the 1980s, a wave of financial deregulation eroded the law. Congress ultimately repealed the Glass-Steagall Act in 1999.
Fast-forward to today, with the global economy still recovering from the economic meltdown of a few years back. To prevent another financial frenzy, Warren, McCain and other lawmakers are touting a bill called the 21st Century Glass-Steagall Act. It would help bring an end to the era of “too big to fail” banks. The biggest institutions would have to downsize along functional lines. The bill would reduce the opportunities for big banks to use their government guarantees and subsidies to engage in speculative activities.
Last week, Consumers Union joined with more than 160 state and national groups (PDF)—the 81st anniversary of the Glass-Steagall Act—to call on Congress to pass this bill. The coalition includes business associations, labor unions, law firms, faith organizations, state lawmakers, national and state consumer groups, and others.
We believe this bill is an important step in creating a banking system that works better for consumers, our communities, and our economy.