Five Reasons Glass-Steagall Matters

The Glass-Steagall Act came up as a major point of disagreement between Bernie Sanders and Hillary Clinton during Saturday's Democratic presidential debate. The act, which was originally enacted in 1933, separated risky trading and investment from traditional banking activities like business lending and consumer finance.

1933. "Anthony Adverse" and "Magnificent Obsession" were topping the bestseller lists. "King Kong" and the Marx Brothers were big at the box office. What does a law passed back then have to do with the 21st century economy?

As it turns out, a lot.

Bernie Sanders wants to implement a new version of the law, which was repealed in 1999 after having been in effect for more than 75 years. Hillary Clinton, on the other hand, is not calling for its reinstatement.

Sen. Sanders is right. Here are five reasons why it is important to reinstate the Glass-Steagall Act.

1. Too-big-to-fail banks are bigger, riskier and more ungovernable than ever

America's largest banking institutions are even larger now than they were before the 2008 financial crisis. The nation's six largest banks issue more than two-thirds of all credit cards and more than a third of all mortgages. They control 95 percent of all derivatives and hold more than 40 percent of all U.S. bank deposits.

Simon Johnson, former chief economist for the International Monetary Fund, points out that Glass-Steagall is needed as part of a broad effort to make these banks "simpler and more transparent." Johnson also observes that:

"In the run-up to the 2008 crisis, the largest U.S. banks had around 4% equity relative to their assets. This was not enough to withstand the storm ... Now, under the most generous possible calculation, the surviving megabanks have on average about 5% equity ... that is, they are 95% financed with debt."

As Johnson makes clear, these banks continue to pose a grave risk to the economy. He also notes that they have continued to engage in sanctions violations and money laundering -- behavior that suggests they are still out of control.

2. The argument that the absence of Glass-Steagall didn't cause the 2008 financial crisis is wrong.

Hillary Clinton told the Des Moines Register that "a lot of what caused the risk that led to the collapse came from institutions that were not big banks." This is part of a longstanding pattern, in which she largely absolves the big banks from culpability for the 2008 crisis while emphasizing "shadow banking" in her own Wall Street plan.

Secretary Clinton returned to that theme during Saturday's debate, pointing an accusing finger at non-bank entities like AIG and Lehman Brothers while giving a pass to Wall Street's biggest banks for their role in the crisis.

Robert Reich, Bill Clinton's former labor secretary, summarized the anti-Glass-Steagall argument as follows (without naming Hillary Clinton specifically):

"To this day some Wall Street apologists argue Glass-Steagall wouldn't have prevented the 2008 crisis because the real culprits were nonbanks like Lehman Brothers and Bear Stearns."