You've heard it a thousand times from Hillary Clinton and her advisors and supporters: Bernie Sanders' call for a reimposition of Glass-Steagall is misguided because Glass-Steagall wouldn't have prevented the financial crisis.
Well, that's a disingenuous argument, and here's why:
Sen. Bernie Sanders (I-Vt.), along with Sens. Elizabeth Warren (D-Mass.), John McCain (R-Ariz.) and others, has called for the passage of an updated version of the Glass-Steagall Act in our nation's next round of financial reforms. Sanders's rival for the Democratic nomination, former Secretary of State Hillary Clinton, joined by her husband's former Treasury secretary, Larry Summers, objects to this proposal ... Her professed ground is that the original Glass-Steagall Act wouldn't have prevented our most recent crisis, which was caused mainly by shadow banking.
This is a bit like objecting to the iPhone 6s because your flip phone had inadequate functionality. It suggests incomprehension of Sanders's, Warren's and McCain's proposals, for the whole point of these proposals is to regulate 21st-century shadow banking just as the original Glass-Steagall regulated 20th-century shadow banking.
What the heck is shadow banking? And why should we care about it?
Basically, it’s risky bank-like functions that are performed by institutions that aren't banks, and aren't as closely regulated as banks.
The most dangerous such function is that of borrowing short-term in order to invest in longer-term financial instruments, all while hoping that you will be able to "roll over" — renew or refinance — your short-term loans over the durations of those longer-term investments. When you can do that, you can make a great deal of money by investing in higher-end speculative financial instruments, because short-term borrowing costs are lower than long-term speculative yields. But you also put those who lend to you — notably bank depositors or counterpart small savers... — at great risk, for you're engaged in a "musical chairs" form of finance: You avoid bankrupting yourself and your lenders only as long as your speculative investments keep rising, bubble-fashion, in price.
The 1920s version of shadow banking occurred between the kinds of basic banks that ordinary workers kept their money in, and securities firms that handled investments for the wealthy. The securities firms borrowed from the depository institutions (and thus from their depositors) and used that money to invest in speculative investments. It produced a massive investment bubble, which burst, bankrupting first the securities firms and then the banks that had lent to them.
This is the situation that the Glass-Steagall Act was designed to prevent happening again.
The 21st-century version of Glass-Steagall advocated by Sanders, Warren, McCain and others aims at today's versions of shadow banking: The versions highlighted by the 2008 crash.
What are those? Well, there are a number of them, but the basic idea can be illustrated clearly enough through one typical example: In the lead-up to 2008, many working Americans had come to hold money in so-called "money market mutual funds" (MMMFs). These funds were designed to look and act like bank accounts: one share was valued at one dollar, you could write checks and use payment cards on your accounts with them, etc. Problem was, these bank imitators were not carefully regulated as banks. Indeed, they acted much as banks had done prior to the 1929 crash and the first Glass-Steagall Act: They made short-term loans to securities firms and other high-flying financial institutions — firms like Bear Sterns and Lehman Brothers — that used short-term borrowed funds to make highly speculative investments in bad mortgage products and other high-risk financial instruments. The results were predictable and catastrophic: In essence, a replay of the Wall Street binge of the 1920s, culminating in a crash much like that of 1929....
The updated Glass-Steagall proposals pushed by Sanders, Warren, McCain and others is a 21st-century Glass-Steagall, designed to end or to regulate today's shadow banking and conglomeration just as the original Glass-Steagall ended the last century's shadow banking and conglomeration.
So when you hear the refrain, But Glass-Steagall wouldn't have prevented the financial crisis, so Bernie Sanders trying to reimpose it is pointless and misguided!, understand of course it wouldn't have. But Bernie isn't trying to reimpose Glass-Steagall — he's trying to impose a new and improved version of it that does the equivalent for today's situation of what was done by FDR after the great crash of 1929.
Glass-Steagall ensured stability in the financial system for many decades, and hopefully its 21st century successor will do the same.