Keep consumers safe by bringing back Glass-Steagall Act

A year ago the U.S. Treasury was pumping billions of borrowed dollars into banks judged to be "too big to fail." This cannot be allowed to happen again.

This page has already suggested one solution. It is a radical one: Make the big banks small enough to fail. Break them up.

Nearly a century ago, the government broke up Standard Oil into the companies that became Exxon, Mobil, Sohio and Chevron. It worked fine. It didn't retard the American economy at all. Former Fed Chairman Paul Volcker has proposed doing the same to J.P. Morgan Chase and Bank of America. It should be done.

There is an obvious way to begin. Bring back the Glass-Steagall Act. That was the original law, passed in the Roosevelt administration, that created deposit insurance. To limit the risk to the Treasury, it forbade a bank holding company from owning other financial companies. The law was repealed during the Clinton administration in order to let Citibank buy an insurance company.

This law should be re-enacted. Bank of America, Chase and Citibank should be split from their insurance and investment banking operations.

Another thing: equity capital.

Consider a homeowner. The more equity in his house, the more reverses he can take before he loses it. His equity is his cushion. It is the same with a bank. The more capital it has, the more losses it can absorb.

Capital is costly. It limits profit, and so banks have skimped on it. But they need more of it.

Alan Hess, professor of finance at the Foster School at the University of Washington, suggests that the bigger the bank, the higher the minimum percentage of capital should be required.

The big banks will object. They will say they are being penalized for size. That's right. Size has been too attractive. The pursuit of size led Washington Mutual off a cliff.

In banking, size is dangerous. Let's limit it, and make ourselves safer.