Off all the most bizarre statements running around about this crisis, the most bizarre is the shockingly common belief on the left that this can somehow be traced back to the Gramm-Leach-Bliley act, which "repealed" Glass-Steagall. (The equivalent, not-quite-as-loony belief on the right is that if we hadn't had such tough redlining laws, or such deep government interest in expanding homeownership, this wouldn't have happened). This is wrong in so many ways that one hardly knows where to start.
Let's start with the history: there were actually two Glass-Steagall acts, but what we're generally referring to is the second one, passed in 1933, which did a number of things.
- It regulated interest rates, including setting a rate of zero on demand deposits. This was rolled back decades ago, which is why you now get interest on your checking account, and banks strive to offer you an attractive interest rate rather than a free toaster when you open an account with them.
- It established the FDIC to insure bank deposits. Last time I looked, the FDIC was still there, keeping my $7.67 safe from harm.
- It separated investment banking and commercial banking, which is why Morgan Stanley and JP Morgan are two different institutions. This was effectively dead letter when Traveler's bought Citigroup in 1998, but Gramm-Leach-Bliley officially repealed this provision in 1999.