The Shattered Arguments for a New Glass-Steagall
Investment banking isn’t risky. What’s dangerous is creating stand-alone firms that can’t diversify.
Gary Cohn may not be the first White House official you’d expect to favor reinstating Glass-Steagall, the Depression-era law that split commercial banks from investment banks. Yet Mr. Cohn, the former Goldman Sachs president who now leads the National Economic Council, urged just that in a private meeting with lawmakers, according to Bloomberg News. This is deeply disappointing, particularly coming from an administration that seeks to stimulate growth by removing the government shackles that suppress competition and burden markets.
The 1999 repeal of Glass-Steagall was unfairly blamed in the aftermath of the 2008 financial crisis. Some people—apparently Mr. Cohn among them—mistakenly believe that investment banking is so risky that it should be once again kept separate from commercial banking. The truth is exactly the opposite: Traditional investment banking entails very little risk. The danger is stand-alone investment banks that are not diversified enough to survive a shock.