Putting Glass-Steagall back into play is one of the several changes that are required in order to fix this mess. Increasing the capital reserve requirements for banks is another. Requiring people actually be able to repay the mortgages is another. Along with significant reversal of the community reinvestment act.
However, you are correct in that in the short term, it can work against an economic recovery as banks adjust to the legislation. However, if there is a period of time spanning several years, and changes are made in incremental steps, then the finance industry can be restructured to the way things were in the 80’s with less risk taking in the whole market place.
Of course, none of this will do any good if the government keeps spending us into a pauper state.
FDIC Approves Giving Banks Reprieve From Capital Requirements - BL, 2009 December 15, by Ian Katz Bank regulators including the FDIC and Federal Reserve want to permit a phase-in of capital requirements that rise starting next month under a change approved by the Financial Accounting Standards Board (FASB). The rule, passed in May, eliminates some off- balance-sheet trusts, forcing banks to put billions of dollars of assets and liabilities on their books. “We’re still recovering from the damage these structures caused,” FDIC Chairman Sheila Bair said, explaining that the entities contributed to the financial crisis. The phase-in recognizes the “very fragile stage in our economic recovery,” ..... The Federal Deposit Insurance Corp. gave banks including Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. a reprieve of at least six months from raising capital to support billions of dollars of securities the firms will be adding to their balance sheets.
Requiring people actually be able to repay the mortgages is another. - That would be nice, but it was clearly against the government's "Home ownership in every pot" policies.
Not Losing Is New Winning as Bankers Dilute Overhaul - BL, 2009 December 14, by Alison Vekshin and Michael J. Moore The backlash against bailouts and bonuses is making it harder for Wall Street to get its way as lawmakers redesign the framework for financial oversight. The biggest banks may be forced to submit to a new regulator for mortgages, credit cards and other consumer products; put $150 billion into a fund the government will use if they collapse; and pay more to insure deposits. Still, the firms that helped precipitate the worst financial crisis in 70 years have so far sidestepped proposals that would have split investment and commercial banking, capped pay or seriously hurt their ability to make money. “The industry is not losing as badly as it thought it might,” said Oliver Ireland, a former associate general counsel at the Federal Reserve and now a partner at law firm Morrison & Foerster LLP in Washington. “The fact that someone had a worse proposal on the table and it doesn’t happen -- it’s hard to view that as a win. It’s not as big a loss.” ..... The meeting between fiscally conservative House Democrats and lobbyists for the largest U.S. financial firms turned tense, with a lot of finger-pointing, recalled one attendee. The message delivered over breakfast: We bailed you out last year with taxpayer dollars. Now help us address the needs of constituents by aiding struggling homeowners and lending more.
Along with significant reversal of the community reinvestment act. - That would be nice, but that actually was (and still is) the policy in effect.
FDIC’s Bair Is ‘Concerned’ Banks Only Making ‘Safest Loans’ - BL, 2009 December 14, by Steve Geimann Federal Deposit Insurance Corp. Chairman Sheila Bair said she’s “concerned” that U.S. banks are making only the safest loans, and encouraged the companies to step up their pace of lending. .....
Enough said about where they stand on that?
Putting Glass-Steagall back into play is one of the several changes that are required in order to fix this mess.
- What exactly would that do?... except shrinking domestic financial industry? It's like stopping drilling domestically because "we no longer like oil" and want to move to "green" fuels. We'll just have to pay more for the services and products provided by both shrinking domestic and growing foreign companies, and investments will flow where they will find a better rate of return. We may adapt to that - people usually do - but how would that mean as anything getting better?
We have lost / sold through FDIC barely 140 banks so far, after a horrendous liquidity crisis and real estate equity bubble caused in great part by government policies, overregulations and underwriting -- with S-G having been repealed. With S-G in effect, in late '80s / early '90s S&L crisis (also rooted in real-estate bubble) we have lost more than a 1,000 banks. The risk was the same, because it didn't depend on the spread, the conditions for failure were outside of what G-S was supposedly designed for.
If something ain't the problem, there ain't no point in fixing it. We should not make "white swan" policies because we have encountered an entirely predictable "black swan" event.