From 1933 to 1999, the Glass-Steagall Act separated commercial banking from investment banking, preventing deposit-taking banks from using consumers’ money for risky stock market investments.

For two decades prior to Glass-Steagall’s repeal, the financial sector experienced robust, record-breaking growth.

And less than a decade after the law was repealed, the US’s financial system experienced near-total collapse, forcing the government to bail the big banks out with hundreds of billions in taxpayers’ money.

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Yet, despite these basic facts, bankers are saying that a return to the Glass-Steagall Act — which would see some of the US’s largest banks get broken up — would have a “severe effect” on the banking system, and are warning that it would mean banks would lend less to businesses and consumers, further hurting the economy.

“The impact on Wall Street would be severe,” Wayne Abernathy, a vice president at the American Bankers Association, told Bloomberg news service.

The issue of returning to the Glass-Steagall Act — which was enacted in the 1930s as a way of preventing another stock market crash like the one that happened in 1929 — has become a hot topic in Washington ever since Sen. John McCain (R-AZ) and Sen. Maria Cantwell (D-WA) put forward a bipartisan bill to bring back some of the provisions in the original Glass-Steagall Act.

Bringing back the wall between investment and commercial banking means that some of the highest-profile banks in America — including Goldman Sachs and Citigroup — would have to be broken up. And while that idea sends shudders down the spines of Wall Street traders, it has plenty of appeal on Main Street, where anger with the bank bailout has been simmering for more than a year.

DEVASTATION ON WALL STREET — OR NO CHANGE?

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Yet not all opponents of Glass-Steagall believe it would have a “severe” impact on Wall Street — some are saying it would change nothing at all.

“If you look at what happened, with or without Glass-Steagall, it would have made no difference,” Bloomberg quoted H. Rodgin Cohen, a corporate lawyer involved in many cases stemming from last year’s financial collapse. Bloomberg reported:

Cohen and others say the law wouldn’t have saved Bear Stearns or Lehman Brothers Holdings Inc., both of which were pure investment banks, from collapse. And the government would not have been able to enlist JPMorgan Chase & Co. to take on the assets of Bear Stearns or allow Goldman Sachs Group Inc. and Morgan Stanley to become bank holding companies, giving them access to the Federal Reserve’s discount window. Rather than split up banks, regulators should provide better supervision and require tougher capital requirements, said Cohen, who was also involved on behalf of banking clients in shaping the bill that dismantled parts of Glass-Steagall.

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Other defenders of the status quo have made far less substantial arguments.

“I think going back to Glass-Steagall would be like going back to the Walkman,” said an unnamed Treasury official.

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Political observers say that the McCain-Cantwell bill has only a slim chance of becoming law. When the bill was tabled earlier this month, Sen. Chris Dodd (D-CT), chairman of the Senate Banking Committee, said it would be “pretty difficult” to garner the support needed in the House and Senate to pass the legislation. The current financial reform measures working their way through Congress do not include anything quite as landscape-shifting as a return to Glass-Steagall.

For some economic analysts, the push to bring back Glass-Steagall amounts to war.

“Congress is at war with Wall Street,” Lyle Gramley, a former board member of the Federal Reserve, told Bloomberg. “They perceive Wall Street as being the root source of our financial crisis, and they want to do something to make sure that doesn’t happen again.”

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Yet for other observers, it isn’t war enough.

“The repeal of Glass-Steagall has exposed the U.S. economy to a level of risk that is simply unacceptable,” House Rep. Maurice Hinchey (D-NY), who introduced a bill similar to McCain-Cantwell in the House, wrote in a recent column.