Glass Steagall Wouldn't Have Saved Us In 2008, and Won't Now

John “Maverick-LOL-JK” McCain and Elizabeth “Cherokee-Warrior” Warren have recently made a push to reinstate Glass-Steagall, which was the act that separated commercial and investment banking. The former law, passed in 1933 and repealed in 1999, was a response to the Great Depression, and to many, it seems obvious that the repeal of Glass-Steagall contributed to the financial crisis of 2008. If those greedy bankers hadn’t been able to raid commercial banks of all their savings, they wouldn’t have made such crazy bets!

But did the repeal of the act really contribute to the fact that hundreds of thousands of Americans were living under subprime mortgages? Did it affect the fact that banks for decades consistently get money from the government as soon as someone yelled “Sell!”? Federal Reserve Governor Daniel Tarullo isn’t so sure that reinstating it should be our primary concern in preventing his organization from facilitating the bailout of banks.

Tarullo’s rationale is that there are more pressing threats, like the fact that banks rely on short-term funding markets, looking to make a quick billion instead of focusing on long-term growth. He would like us to have more “manageable risks,” whereas McCain and Warren make vague pronouncements about wanting to stop “the game these banks have played for far too long”.

Fortunately for big banks and our elected representatives, and unfortunately for the American people, most of these provisions were written into Dodd-Frank. You know, that financial regulation bill named after that dude who left Congress to become head of the MPAA, making sure that 12-year-olds don’t see boobies in movies? And the guy who ranked in the Top 10 Political Sex Scandals for Time Magazine for hiring a male prostitute? This behemoth of financial regulation, which is carte blanche for special interest bureaucrats to write provisions that look like they hurt banks but really help them, allows for well-intentioned ideas like moving Glass-Steagall into the 21st century.

There aren’t many in the United States who enjoyed the way the economy was from 2008 to the present, and none of us want to see any form of recession. The blame for the crisis should fall on multiple parties, but those parties shouldn’t be the same ones writing the solutions. In a world where moral hazard is a piece of economic history, there is little incentive for the rules being written to have a sizable impact on the functions of large multinational banks. It’s not surprising that Former Senator Ted Kaufman (D-Del.) said that heavy lobbying by financial firms accounted for 90% of the political activity of the 848-page bill.

In 2012, New York Times columnist Andrew Ross Sorkin called the notion that Glass-Steagall would have prevented the mass destruction of American wealth in 2008 “revisionist history”. Bear Sterns and Lehman Brothers, the dynamic duo at the genesis of the meltdown, were both investment banks with no commercial entity. Then there was the housing market collapse, which was more the result of misguided policy, grotesque incentives, and the failure of many to understand the types of business relationships they had entered in. If it sounds too good to be true, it probably is. Just ask those who are underwater on their mortgage while others make off with billions.

I can certainly understand the desire to do all that you can to prevent future crises from happening, but the question isn’t whether or not Dodd-Frank is doing more harm than good. It's why we keep electing and supporting politicians who keep the revolving door spinning. Until we realize that larger, more expansive bills give special interests the ability to carve out their own provisions, these situations will keep occurring. In a world where access to the policymakers is a commodity, there will always be a market for favors from those with the power. Americans just need to vote in politicians who aren’t interested in selling.