You can listen to Bill Clinton’s endorsement of President Obama’s capitulation on tax policy in the following video:

President Clinton did a lot of good things during his administration with regard to balancing the budget. However, his actions relating to the demise of the Glass-Steagall Act may have wiped out the good that he did. I consider the capitulation to the Republicans on tax cuts for the rich and tax holidays for Social Security to have the equivalent potential for destruction as the killing of the Glass-Steagall Act. Bill Clinton obviously did not recognize this, but at the time of the repeal, I knew that this was a very dangerous path to follow. I did not protest at the time as vociferously as I am protesting Obama’s capitulation. I wish I had been writing this blog at the time so I could have raised my voice more loudly.

In the book Crisis Economics: A Crash Course In The Future of Finance by Nouriel Roubini and Stephen Mihm, the Glass-Stegall Act is mentioned numerous times.

Page 74-75

In all fairness, Greenspan had plenty of company in the relentless drive toward deregulation. For the previous three decades, freeing financial markets from “onerous” regulations had been an article of faith among conservatives. It also became public policy. From the 1980s onward, tight regulations of the financial system instituted during the Great Depression were phased out or eliminated.

The most notable casualty was the Glass-Steagall Act of 1933. Part of that landmark legislation had created a firewall between commercial banks (which took deposits and made loans) and investment banks (which underwrote, bought, and sold securities). Those provisions suffered death by a thousand cuts. Beginning in the late 1980s, the Federal Reserve Board permitted commercial banks to buy and sell a range of securities. At first commercial banks could derive only 10 percent of their profits from securities operations, but in 1996 the Federal Reserve Board raised that threshold to 25 percent. The following year Bankers Trust became the first commercial bank to purchase a securities firm; other banks soon followed suit.

The catalyst for the final repeal of Glass-Steagall was the proposed merger of Travelers with Citicorp. This combination, which brought commercial banking, insurance underwriting, and securities underwriting under the same roof, forced the issue: the new financial behemoth was illegal under existing laws. Late in 1999, after intense lobbying, Congress repealed the remnants of Glass-Steagall via the Financial Services Modernization Act, paving the way for additional mergers between investment banks, commercial banks, and insurers.

One of the key players in the repeal of Glass-Steagall was Republican economist-turned-senator Phil Gramm.

Page 182

The mother of all financial crises – the chain of disasters known as the Great Depression – sparked radical reforms of financial systems internationally. In the United States, the Glass-Steagall Act of 1933 created federal deposit insurance and established a firewall between commercial and investment banking; subsequent legislation gave the Federal Reserve the power to regulate bank reserves. The government brought the stock market to heel as well: the Securities Act of 1933 required issuers of securities to register them and to publish a prospectus, and it made the investment banks that underwrote the sale criminally liable for any errors or misleading statements in the prospectus. The following year saw the creation of the Securities and Exchange Commission, which remains the agency charged with regulating the buying and selling of securities. Though many other countries adopted similar measures, the United States implemented one of the most comprehensive series of reforms.

Page 210

Not only do we need to reduce the TBTF problems by making each institution smaller, we also need to unbundle financial services within financial institutions to reduce the too-interconnected-to-fail problem: with exchanges, broker dealers would be involved only in the efficient execution of trades for clients, not in market making/dealing, which is rife with conflicts of interest, lack of price transparency, and large and systemic counterparty risk. So we need to go back to Glass-Steagall, and even beyond it, to a financial system in which both institutions and their activities are unbundled to make them less too big to fail and less too interconnected to fail.

Page 230

In the wake of the recent crisis, distinguished thinkers like former Fed chairman Paul Volcker have argued for some kind of return to the Glass-Steagall legislation of 1933, which separated commercial banking from investment banking. This firewall eroded in the 1980s and 1990s, finally disappearing altogether with the Gramm-Leach-Bliley Act of 1999. The result was the current system, where a firm like Citigroup or JPMorgan Chase can be a commercial bank, a broker dealer, a prop trader, an insurance company, an asset manager, a hedge fund, and a private equity fund all rolled into one sprawling institution.

Page 231

Many reformers have understandably counseled a return to Glass-Steagall, and as of early 2010, there are bills in Congress that would restore it in some way or another. Thanks to Volcker’s lobbying, the Obama administration was considering whether to prohibit bank holding companies-which now include firms like Coldman Sachs and other major financial players – from pursuing proprietary trading, private equity deals, and any hedge-fund activity. But industry lobbying is likely to prevent the restrictions from being implemented.

Page 233

By unbundling the financial services now combined under one roof, we can steer the financial system away from an excessive reliance on too-big-to-fail-and too-interconnected-to-fail- firms. By returning to a beefed-up version of Glass-Steagall, and by adopting reforms aimed at moving financial activity away from opaque trading strategies and onto transparent exchanges, we can create a safer, saner financial system, with the added benefit of robbing firms of their ability to extract disproportionate profits from deluded investors.

Page 272

Financial crises disappeared only after the Great Depression, a period that coincided with the rise of the United States as a global superpower. At the same time the U.S. government reined in financial institutions with legislation like the Glass-Steagall Act and shored them up by creating agencies like the SEC and FDIC. The dollar became the ballast of an extraordinarily stable international monetary system, and crises came to seem like things of the past.

Page 273

Even more radical reforms must be implemented as well. Certain institutions considered too big to fail must be broken up, including Goldman Sachs and Citigroup. But many other, less visible firms deserve to be dismantled as well. Moreover, Congress should resurrect the Glass-Steagall banking legislation that it repealed a decade ago but also go further, updating it to reflect the far greater challenges posed not only by banks but by the shadow banking system.