Break Up The Banks?

Richard Posner floats the idea:

I said that the separation of commercial banking from other financial intermediation should be considered--not that it should be ordered forthwith. It would be a formidable undertaking, fiercely opposed; and the argument that separation would sacrifice significant economies of scale and scope, while unsubstantiated and rather implausible (think of Citigroup and Bank of America, whose travails seem to have been amplified rather than diminished by the scope of these banks' activities), would have to be carefully appraised.

Merely reenacting the Glass-Steagall Act (and repealing the statute that repealed it)--the New Deal statute that separated commercial from investment banking--would not avoid the complexities involved in divestiture. As explained by Robert Pozen ("Stop Pining for Glass-Steagall," Forbes, Oct. 5, 2009, www.forbes.com/forbes/2009/1005/opinions-glass-steagall-on-my-mind.html (visited Oct. 13, 2009)), "Even under Glass-Steagall commercial banks could invest in bonds, manage mutual funds, execute securities trades on the order of their customers and underwrite government-related securities. The main thing they couldn't do was underwrite corporate stocks and bonds...The main impact of repealing Glass-Steagall was to allow banking organizations to become more active in underwriting." So a greater rollback of financial deregulation than merely re-enacting the Glass-Steagall Act would be necessary for a clean separation of commercial banking from other financial intermediation. (Greater, but in one respect lesser, as there is no good reason to forbid commercial banks from underwriting securities issues, a central prohibition in Glass-Steagall.)

Such a rollback is conceivable, if barely...