Bernie and the banks: Bernie Sanders’s obsession with Glass-Steagall is misplaced

A CENTRAL part of the Sanders economic plan is to break up big banks by reinstating the Glass-Steagall Act. Until its repeal in 1999 Glass-Steagall separated supposedly staid deposit-taking banks from riskier investment activities. Today, large “universal” banks like Citigroup and Bank of America both take in customer deposits and trade in risky global markets. Breaking up the banks has some merit as an idea; it is more realistic than many of Mr Sanders’s other proposals (see article). This week, Neel Kashkari, President of the Minneapolis Fed, said it was worth considering (among other policies). Nonetheless, a focus on Glass-Steagall—to the exclusion of other ideas for making banking safer—is misplaced.The root problem with banking is simple; that some banks are “too-big-to-fail”. The problem has two parts. First, the government feels obliged to bail out a large financial institution if it fails. Second, the probability of a bank failing is large enough to be worth worrying about. Glass-Steagall would address one part of the first problem, by moderately reducing the government’s incentive to bail out banks.One reason governments rescue banks at the height of a crisis is to protect the payments system. If a commercial bank goes into bankruptcy, depositors may not be able to access their funds to pay bills. This is catastrophic for the economy, as it causes spending to …

Leave a Reply
