But is there any logic to such a move?
The first question has to be: did the fusion of the two forms of banking contribute to the financial crisis in the first place?
Well, it's far from incontrovertible. Glass-Steagall, the 1933 act legally separating the two functions, was repealed in 1999. As a fascinating piece in the New Yorker about the role of Chairman of the National Economic Council's, Larry Summers, in the crisis, makes clear, there are those who hotly dispute the repeal of the act as a cause.
As Ryan Lizza points out in the piece:
"Others note that the pure investment banks, like Lehman Brothers, have been the greatest source of instability, while the banks with combined commercial and investment arms have fared the best."However, Robert Reich and Joseph Stiglitz are both clear that the issue wasn't necessarily about institutional arrangements, it was about the cultural impact of such arrangements. The casino approach won out over the safety first approach. There is little doubt that high-risk investment meant that traditional banks were up to their necks in it, even if it was Lehman Brothers, AIG, Bear Sterns, and Merrill Lynch who were swallowed by the waves. In the UK, that meant that our High Street banks were in severe jeopardy.
It's a difficult case to prove, but there is little doubt that the major banks on which savers and investors depended had become severely incautious. We can simply speculate on whether that was due to structural issues. Stiglitz and Reich argue that it was due to the consequences of such arrangements. Others, such as Robert Shiller, argue that there was a dynamic that led to ever greater risk taking. Both are right. Would having Glass-Steagall in place have prevented the financial crisis? No, I don't think the evidence is there to support that but it was probably a contributing factor. However, that does not mean that we should not consider re-introducing it.
Mervyn King's concerns are that these super-institutions: (i) are very difficult to police and regulate; (ii) when they go wrong, pose systemic risk. I agree with him.
A separation of the casino parts of the banking system from the boring bits would make things far more transparent and would place a division between the two conflicting cultures that define each. There would still be risk and the investments that High Street banks were making on our behalf would have to be monitored carefully for contagious risk as would the risks taken by insurance and pension companies. This would be far easier if there was a separation.
The argument is not just historical, it's about the future as well. As a nation that plays host to a disproportionately large financial sector, we have an interest in de-risking our exposure as depositors or, far more probably, as tax-payers.
As things stand, we have the most appalling moral hazard within our financial system. Bankers thought that they would be bailed out prior to the financial crisis. Now they know that they would be. They only way to reverse that is to ensure that no bank is 'too big to fail' and the legal separation of investment and High Street banking is part of that.
Post script: There was an intriguing debate between Will Hutton and Heather McGregor in The Observer on Sunday. My beef and Yorkshire pudding ended up on the carpet when I read this pearl from Heather McGregor:
"Lord Turner and I may agree on bonuses, but we disagree about the social relevance of investment banks. Would I miss Goldman Sachs if it didn't exist? At every level – not only does it provide a valuable service to companies whose continued financial health my business depends on, but even at the most basic level they help the country – the tax their UK bankers pay on their bonuses will help fund our budget deficit."And why, pray, do we have a Budget deficit of £175billion or so if it was not for the reckless actions of those who you want to reward handsomely to pay down the very same deficit?!?
Her piece improves as it goes on. I made friends with her again towards the end of the piece when she argues:
"We need to return to an age when investment banking and mainstream banking are separated, as they were in the US under the Glass-Steagall Act"Unfortunately, the gravy stain is still on the carpet just as the gravy train has already left the station.
Post script 2: Though he doesn't argue that banks should be broken up, Martin Woolf takes on the moral hazard and 'too big to fail' arguments in his column today. Worth reading.