Banks that hold deposits have no business investing those funds in risky ventures.
Glass-Steagall wanted to put an end to the risky investments that banks were making with other people's money.
Yet one of the main provisions of the bill, which instituted the FDIC (Federal Deposit Insurance Corporation) creates some of the moral hazard which has inadvertently permitted banks to play fast and loose with other people's money.
Banks that make bad investments can depend on the FDIC to pay out the toxic indebtedness that swallows up failing banks. The fewer safeguards provided by the federal government, the better. The fear which grips private investors is understandable, yet the panics in years past which terrify depositors to make a run on the bank has more to do with the interventions of the government into financial matters. This matter deserves greater attention than currently documented.
Instead of outlawing the investment of private deposits into Wall Street, why not merely demand that banks come clean about the practice, requiring them to inform depositors that their funds will be invested in the Stock Market as well as in loans of all sorts? If banks are entering the investment practice, then they at least must come clean about the practice with prospective customers. Otherwise, banks will continue to engage in the same legal fraud which permits them to maintain merely a fractional reserve of cash on hand while loaning out the rest in wild and uncertain investments.
The real culprit in banking, the fractional-reserve, has created many of the problems which afflict the financial sector without providing adequate backing for individual deposits.
The question remains: even if the government imposes rules which prevent banks from investing private monies into risky ventures, what is to be done if rogue banks insist in engaging in such illicit activities?
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