"I hear time and again people placing the blame of the banks getting in trouble on the repeal of Glass Steagall which separated commercial banking from investment banking. As you look at the commercial bank problems, they invariably came from bad bets on the inflated real estate market. Banks bought MBS, CMOs or whole loan mortgage pools and they lost billions on those investments all of which were allowable under Glass Steagall. Even the CDOs that were backed by MBS would arguably have been permitted under Glass Steagall. None of the banks were in trouble from stock trading or underwriting which was the main reason Glass Steagall was put in place after the Crash of '29. No law will protect bankers from their own greed. When long term Treasury rates increase substantially, which they will, you will see which banks went long duration and are caught swimming without their trunks again. So banks will have blown themselves up on lousy credit and risk free credit instruments all within a decade or less.

David Fuller's view Fair point - the Glass-Steagall Act of 1933 could not have anticipated the derivative cocktails used by banks to blow up their customers if not always themselves. That is why in my response yesterday I favoured the reintroduction of an updated version of this Act.

Most of the banks' toxicity would be removed by separating commercial and investment banking, putting much tighter limits on fractional reserve banking, placing limits on the use of leverage and preventing banks from becoming 'too big to fail'.