How Political Clout Made Banks Too Big to Fail

May 30 (Bloomberg) -- The U.S. has historically kept thefinancial sector in check through a combination of soundprinciples and serendipitous decisions. But as the financialsystem gained strength in recent years, it also gained politicalinfluence. In the last decade, it has become too concentratedand too powerful, which has damaged not only the economy but thefinancial sector itself.

How did it happen? In 1933, the Glass-Steagall Act erecteda wall between two ways that banks could help customers borrowmoney. The idea was to keep commercial banks from exploitingtheir depositors, who might get saddled with the bonds of firmsthat could not repay the money they owed. One beneficial sideeffect of the Glass-Steagall Act was to fragment the bankingsector and reduce the financial industry’s political power.Another was to foster healthy competition between commercialbanks and investment banks.