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Deregulation, Free Markets, and Econ 101: Part 2

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By J. Davidson Frame September 27, 2008

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Three years after the crash of the stock market in 1929, the US banking system collapsed (1933). Congress determined that the mixing of commercial banking and investment banking contributed to conditions that led to the cataclysm. Consequently, in 1933 Congress passed the Glass-Steagall Act to build a wall between these two realms of financial activity. The motivation was to maintain the integrity of depository institutions by shielding them from risky ventures associated with investment banking.

In the 1980s, commercial banks increasingly began taking riskier initiatives, while investment banks ventured into commercial banking-like activities. It was time to re-visit Glass-Steagall to see if it was still relevant fifty years after its passage. To this end, in 1987 William D. Jackson of the Congressional Research Service wrote a seven-page analysis that should be must reading for policy makers and concerned citizens alike. In its simplicity and adherence to fundamentals, this paper shows that you don’t need a PhD in finance to anticipate the consequences of regulatory policy.

Following is a direct quote from Jackson’s paper, where he describes the dangers of repealing Glass-Stegall:

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