Why do we have financial crises? Why do banks lose money?

If history is any guide, it hasn't often been the result of speculative bets. It has been the result of banks making loans to individuals and businesses who can't pay them back.

Yes, standards became so lax that buyers didn't have to put money down or prove their income, and financial firms developed dangerous instruments that packaged and sliced up loans, then magnified their bets with more borrowed money.

But it often starts with banks making basic loans. Making loans "is one of the riskiest businesses banks engage in and has been a major contributing factor to most financial crises in the world over the last 50 years," Richard Spillenkothen, former director of the division of banking supervision and regulation at the Federal Reserve, wrote in a letter to Politico's Morning Money on Monday. He said that if Glass-Steagall still existed, it "alone would not have prevented the financial crisis."

Still, Mr. Spillenkothen said: "If banks had been limited to 'plain vanilla' lending, notwithstanding its admitted riskiness, the financial crisis may well have been less severe or more easily managed and contained."

In my conversation with Ms. Warren she told me that one of the reasons she's been pushing reinstating Glass-Steagall - even if it wouldn't have prevented the financial crisis - is that it is an easy issue for the public to understand and "you can build public attention behind."

She added that she considers Glass-Steagall more of a symbol of what needs to happen to regulations than the specifics related to the act itself.

So would Glass-Steagall make things slightly better? Sure.

But the next time someone says that it is the ultimate solution, think again.

David Fuller's view Andrew Ross Sorkin is technically correct in this assessment but I feel that he misses the behavioural message sent by repeal of the Glass-Steagall Act during the Clinton Administration. Along with revoking the Up-tick Rule, it signalled to Wall Street that it was all-powerful, could push regulators around and basically do whatever it wanted in pursuit of profit.

In other words, it opened the door to a lamentable deterioration in standards of governance within what has often been an amoral industry. This led to an insane increase in leverage, mainly via derivative contracts, some of which only the maths wonks understood.

Yes, banks will always make some bad loans, often because 'everyone else is doing it'. Leverage combined with a lapse of ethical standards creates a toxic cocktail. The CDOs at the centre of the 2008 financial crisis, with their improbably optimistic stated yields proved so popular with gullible customers that salesmen in Wall Street banks clamoured for ever more of them. The rest you know.

Standards of governance are established in a top-down process and in the financial industry profit too often trumps morality. Fortunately, there is a litmus test to alert you when speculation is getting out of hand. When Wall Street banks talk about "spreading risk" (translation: we have parcelled it out among the suckers) head for the hills.

Note: there are 12 earlier references to Glass-Steagall in the Archive. The most recent of these was on 1st November 2011 and you may also be interested inJoseph Stiglitz's excellent article: Capitalist Fools, posted on 27th March 2009.