What is Glass-Steagall?

...And why do you care?

In the wake of the recent JP MorganChase debacle, those of you following my Twitter feed know that I've joined in calling for a return to Glass-Steagall. 

But why? And what is Glass-Steagall, anyway.  This article, though somewhat slanted toward a bankers view of things, does a nice job of summarizing the key provisions of Glass-Steagall. 

So, here's the deal.  Because certain banks were deemed too big to fail, we not only had a huge financial meltdown -- banks were speculating with their depositors' money and lost, we also had a HUGE government-funded bailout of banks.  That would NOT have happened had Glass-Steagall been in play.  In fact, Glass-Steagall was the law of the land from 1933 until 1999.  66 years and American banking was thriving by all accounts. 

Within just 8 years of its repeal, banks were taking on HUGE risks that risked the funds of their depositors' -- funds that are largely backed by and sometimes insured with taxpayer dollars by way of the FDIC.  So, if you're a big time investment banker, you can make a big, risky bet and if you lose, no worries.  The government will be there to ensure you get paid or, at the very worst, that your depositor's get their cash back (up to $250,000 now). 

But, if Glass-Steagall were in place and an investment bank went bad, only the $ in that bank would be at risk...not deposited funds from "normal" banking -- funds backed by FDIC.  So, an investment bank fails and some investors lose and others win.  No problem.  Capitalism is working.  Homeowners and working people don't lose. 

JP Morgan has been around a long time.  They were around pre-Glass-Steagall and thrived post-Glass-Steagall.  The fact that they're making huge, risky bets on the order of those that caused the recent bank meltdown is of concern.  And it wouldn't happen if we had Glass-Steagall.