Glass-Steagall Redux

The proposed return of Glass-Steagall like restrictions on commercial banks was reportedly the cause of the market's decline on Thursday (WSJ article). The Obama administration says that it is not its intent to restore Glass-Steagall but its proposals come pretty close. As a student of banking and finance I don't think this is a bad idea. The repeal of Glass-Steagall was probably one of the leading causes of the financial meltdown as it removed Depression era firewalls that would have stopped or at least severely limited the collapse of the financial dominoes. The removal of the G-S restrictions also added fuel to the fire by creating an overheated and ultra-competitive financial environment where the speed increased at the turn of every lap (ultimately leading to the largest pile up of financial firms the world has ever seen). By allowing commercial banks to enter the world of propriety trading and risk taking the repeal of G-S put the equity of all of the nation's large banks at risk. Big profits are available in trading the firm's capital, so are big losses. If you don't believe me ask anyone at Bear Stearns or Lehman.