I mean it's not really a might not so far as I'm aware - the firms were largely purer focused, one wasn't actually a bank, so enforced separation wouldn't really have done much -
although if you're referring to the prior weakening of regulation and/or as a symbolic standpoint I could agree to an extent.
The problem that remains is that breaking apart investment and commercial arms of these large institutions doesn't mean they won't still be systemically significant, so restraining moral hazard isn't really achieved. If the goal is to "break up the banks" further beyond that then it's also never well specified how small exactly, and on what metric of size, that one would like to see the banking industry capped at. Nor is there acknowledgement of the practical impact that would have.
Meanwhile moral hazard wasn't really limited to the large institutions. Many smaller community banks were bailed out under the TARP program, and I believe they were less likely to actually manage their repayments under the program. The issue is the way that banks operate, all banks, large and small is
inherently risky. (Article's proposed is also impractical, but interesting as a solution.)
More symbolic. The Glass-Steagal repeal was done based on the idea that banks could manage risk using computer models, so regulation wasn't needed. Bush II basically gutting all regulatory agencies certainly didn't help.
As for the bailouts and moral hazard, banks that engage in personal banking need to be bailed out so people don't lose their savings. We found that out during the depression. That is why we have the FDIC. A bank purely engaged in investment banking does not have the same requirement. Moreover, it would be desirable to let an investment bank fail if it goes bankrupt as a result of bad investments. Moral hazard would occur if we did not do that because investment banking firms would not be punished for their inefficiency. We can't let banks that engage in personal banking fail, so banks that engage in personal banking activities should be heavily regulated. Investment banks need to be less heavily regulated so they can take more risks, but in return we have to be prepared to let them fail.
Related to the cause of the financial crisis, I'm not a big fan of explanations that pin the problem all on one firm or one set of actors. The problem was systemic, and there really weren't any angles. As I alluded to above, the idea became widespread during the time period leading up to the crisis that newly developed computer models would allow banks to manage risk better than in the past, so systemic crashes such as what happened in 2008 wouldn't happen. That was strike one. Then, based on that misplaced confidence, the entire industry began creating and selling financial products to each other that simply didn't work. In the realm of personal banking, banks would give mortgages to people that the mortgage buyers had no hope of paying back. Those mortgages played a huge part in inflating a nationwide property bubble, which is ultimately what dragged the broader economy into the crisis. The industry also started selling products like mortgage backed securities and complicated insurance policies to each other. The mortgage backed securities were doomed by the mortgages that backed them. The insurance policies were just insane.
My point with all that is that it is impossible to isolate all of that to any one "bad actor", even though some firms might have been harder hit than others and therefore required a larger bailout or seemed to pose more systemic risk at the time of the crisis. To make an analogy: it was like if the car industry suddenly adopted some weird theory of chemistry or physics that caused them to create and use materials that fell apart in the rain, and those materials subsequently caused catastrophic failures in all of the autos that were sold. Whose fault would that be? The material suppliers who created the materials? The chemists who came up with the theories? The auto manufacturers for using the materials?
The problem is systemic.
The regulation passed after the financial crisis prevents the industry from writing those loans anymore, but there is still political pressure to do away with that regulation from the Republicans. A lot of that political pressure occurs because of donations coming from the finance industry. That speaks to continued political power of the finance industry, which persists partly because little was done after the financial crisis to address the moral hazard created by the mass bailouts. Would reinstating Glass Steagal address that moral hazard? I think it would help by weakening individual players within the industry. Officials in the Obama administration openly gave the size of some of the banks a reason for why more wasn't done, in contrast to past crises such as the S&L scandal in the 80's.
Ultimately, I take support for reinstating Glass-Steagal as a symbolic statement that more needs to be done to address the bad behavior that led to the crisis and the continuing political power of the finance industry. Such a pattern, by the way, has been noted by officials from the IMF as occurring after financial crises in other countries dating back to the Asian crises in 1998.
My Banking Professor in college believed a big issue in the US is that instead of having 5-6 (we'd want more probably) large national banks like Canada, we have all these small banks that are incredibly vulnerable to their local real estate market. If it goes bad, they're likely to fail and need to be bought out. But if it's part of a national bank, the other regions of the country should be able to prop it up.
This of course, would only help solve that specific problem, but I thought it a reasonable view given some of the incentive issues we have with the current FDIC system.
The variation I've seen on this view is that having a few large banks makes them easier to regulate. I think Krugman makes that point. Considering the property bubble in the 2000's leading up to the crisis occurred on a nationwide basis, and the national banks also were affected, I'm not sure having larger nationwide banks would have prevented the problems that occurred.
The problem I see in this country is the influence such powerful actors would have on our political system. That argument also doesn't address the desirability of separating investment banking from personal banking activities.
