Evaluate the pros and cons of the repeal of the Glass-Steagall Act of 1933.

Question

What will be an ideal response?

Answer 1

The Glass-Steagall Act was enacted by Congress in 1933 in response to the numerous bank failures that occurred in the early years of the Great Depression. As noted in the text, from 1929 to 1933 more than a third of all U.S. banks failed, costing depositors (mostly small depositors) about $1.5 billion, or about one and a half weeks' pay (on average).The Glass-Steagall Act created the FDIC and curtailed the activities of commercial banks. In particular, banks were forbidden from dealing in securities, providing insurance, or engaging in any of the other activities undertaken by nondepository institutions. But by separating commercial banks from investment banks the law limited the ability of financial institutions to take advantage of economies of scale and scope that might exist. The Glass-Steagall Act was repealed in 1999 with the passage of the Gramm-Leach-Bliley Financial Services Modernization Act, but with the repeal of Glass-Steagall came concerns about potential mismanagement of large financial holding companies (a limited form of universal banks). The poor performance and outright failure of some of the largest U.S. intermediaries during the financial crisis of 2007-2009 have intensified these management concerns.