Elizabeth Warren and John McCain aren't often on the same side of a debate in Washington. But the freshman Democratic senator and the veteran Republican lawmaker do agree that banking should be simpler and safer.
With the 2008 financial crisis and taxpayer bailouts of banks deemed "too big to fail" in mind, Warren and McCain are working to separate ordinary banks from riskier investment banks.
At Consumers Union, the advocacy arm of Consumer Reports, we think that's a good idea. Here's why: An ordinary bank holds your checking and savings accounts, and its deposits are federally insured, while investment banking engages in speculative trading and other gambles on Wall Street. We don't think big banks should be gambling with insured deposits and other taxpayer-backed advantages.
There was a time when the law didn't allow banks to mingle their routine commercial business with investment banking. The financial collapse that sparked the Great Depression led Congress to erect a firewall between the two. That law was the Glass-Steagall Act, also known as the Banking Act of 1933. For the next fifty years or so, our banking system was stable. But starting in the 1980s, a wave of financial deregulation eroded the law, and Congress ultimately repealed the Glass-Steagall Act in 1999.
Fast forward to today, as the global economy is still recovering from the recent meltdown. To prevent another financial frenzy, Warren, McCain and other lawmakers are touting a bill called the 21st Century Glass-Steagall Act. It would help bring an end to the era of "too big to fail" banks. The biggest institutions would have to downsize along functional lines. The bill would reduce the opportunities for big banks to use their government guarantees and subsidies to engage in speculative activities.
Consumers Union joined with more than 160 state and national groups this month -- the 81st anniversary of the Glass-Steagall Act -- to call on Congress to pass this bill. Our coalition includes business associations, labor unions, law firms, faith organizations, state lawmakers, national and state consumer groups, and others.
We believe this legislation is an important step forward in creating a banking system that works better for consumers, our communities, and our economy.
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