Back in the 1987, outgoing Federal Reserve Chairman Paul Volcker argued against getting rid of the barrier that separated solid commercial banks from Wall Street firms. He argued that savings deposits and sound mortgages, upon which commercial banks were based, should not become collateral for the risky financial instruments of Wall Street.
Volcker lost his argument to incoming Federal Reserve Chairman Alan Greenspan and financial wizards like Robert Rubin. They loved the guy for killing inflation, but they thought he was an old codger. They wanted to make U.S. banks more competitive by ending Glass-Steagall, the Depression era rule that separated commercial banks from financial institutions.
And they got their wish. Robert Rubin helped kill Glass-Steagall when he was Treasury secretary in 1999, though Mr. Greenspan effectively neutralized the law years before by allowing Citi (C) to become a megabank.
Today, in light of what’s happened, Paul Volcker’s early warnings sound prophetic. One has to bet that Mr. Volcker feels somewhat vindicated by his sage advice. And one could also bet that President Obama is listening to Mr. Volcker, particularly since the ex-Fed chief now has an office in the White House.
Could that mean a return to Glass-Steagall? I’d say the odds are better than 50/50.
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