If nothing else, it appears the administration is ready to remove that risk:

“It’s a game-changer because it is truly one step toward removing the casino from Wall Street, if you will.” (http://www.newsy.com/videos/change-of-plans-obama-shifts-focus)

From an Obama speech transcript: “It’s for these reasons that I’m proposing a simple and common-sense reform, which we’re calling the “Volcker Rule” — after this tall guy behind me. Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers. If financial firms want to trade for profit, that’s something they’re free to do. Indeed, doing so –- responsibly –- is a good thing for the markets and the economy. But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.”

The key difference is that commercial banks are meant to be risk controlled institutions that help control a nations money in the form of taking deposits from people wanting to save and giving credit to people wanting to borrow. It’s also important to note that this borrowing is done for standard purchases like a car, a home, etc. This facilitates an efficient use of money and increases productivity. Commercial banks in turn make their money by in essence charging a middle man fee for their service.

Investment banks are similar in that they take money from people that want to save and give it to people who want to borrow. The difference is that the people that want to save are more interested in investing their money in hopes for a profit, which naturally comes with an increase in risk. Additionally, the people borrowing this money are doing so in a more speculative purpose such as starting a company. Investment banks are meant to be the intermediary for these more risky functions in that they will put up the money for an IPO and then take the capital instruments (stocks or bonds generally) and resell them to the lenders.

What the lack of Glass – Steagall does is allow the two banks to merge (as they did in the 80s) and the investment bank arm can use the funds that are gathered from the commercial bank arm for investment banking purposes (note: more risky). This puts a much higher risk into the institution as a whole which is passed on to the commercial bank.

And that’s where we come to today, the banks put too much emphasis on risky investments which caused them to fail. Had Glass – Steagall still been in place, the investment banks would have failed but the more important commercial banks would have been safe.

That seems odd. How could a bank take in assets if they can’t use them to invest those deposits? That is, they would not be able to make *any* money off those deposits? That doesn’t seem right. Perhaps they limit *what* it can be invested in, like only AAA bonds or something. (not that AA would been all that good, since a lot is now junk).

Ultimately this probably means that interest rates for money we put in banks are going to be lower than in the past.