[RayChuang88]

But yet, Wall Street recovered back in 1987 for one reason: banks were not allowed to directly trade in equities due to the 1933 Glass-Steagall Act. As such, bank assets literally became a de facto "economic backstop" the held up the US economy as Wall Street worked through that 25% drop fiasco.

This is why everybody--even many on the Left--want the banks to be subject to the 1933 Glass-Steagall Act again, which would effectively shield bank assets from the ups and downs of the stock market. Note that both the 1929 and 2008 stock market crashes had horrifying consequences because when the market crashed, it took bank assets along with them.

[pgyanke]

Which, by the way, was the purpose for the Glass-Steagal Act in the first place!

[NVDave]

I would add one more issue to your point:

G-S 1933 also put a firewall between banking and insurance.

Now we have an insurance company (eg, AIG) getting into the banking sector through unregulated derivatives, and in effect, exposing the assets of an insurance company to the banking sector, which is exposed to the markets in the ways which you detail. In effect, all the firewalls are gone.

We need to stovepipe the investment banks, commercial banks and insurance companies to prevent flash-over from happening again.