Elizabeth Warren and John McCain want Glass-Steagall back. Should you?

Dylan Matthews writes in WonkBlogElizabeth Warren and John McCain want Glass-Steagall back. Should you?.

"So it really matters what problem Warren-McCain is meant to solve. If its intent is to break up the big banks, then there’s a question of whether or not we should just cap the size of them, rather than dictating what kind of banking the now-smaller banks can and can’t engage in. If the intent is to split up investment and commercial banking, regardless of scale, then it’s worth considering whether the privacy and other benefits of that are outweighed by the diversification advantages of merging different kinds of financial businesses.

Those are difficult, technical questions. There are sound arguments to be made that the breaking up the big banks wouldn’t do all that much, or that its effects would actually be harmful; Canada, after all, had a very mild crisis despite having a very concentrated banking sector. Many of the companies that proved most fragile in the 2008 financial crisis were not mergers of commercial banking and investment banking: Bear Stearns and Lehman Brothers were pure securities firms, and AIG was an insurance company. .And maybe, as Sens. Sherrod Brown (D-Ohio) and David Vitter (R-La.) have proposed, setting higher capital requirements is better than enforcing size restrictions."

From what I know it's true that the repeal of Glass Steagall didn't contribute all that much directly to the crash. It did makes banks bigger and did add to the greed and risk taking on Wall Street, but it also allowed stronger banks to buy weaker banks when things went bad. No one else could cover the loses. But I think it makes absolute sense that we shouldn't be offering public insurance (FDIC) or subsides (Fed loans) to firms that do high risk financial business (what used to be called investment banks).