During the Nov. 14th Democratic debate, Senator Bernie Sanders launched an attack on Former Secretary of State Hillary Clinton's connections to Wall Street:

...Why, over her political career has Wall Street been... the major campaign contributor to Hillary Clinton? You know, maybe they're dumb and they don't know what they're going to get, but I don't think so... why do they make millions of dollars of campaign contributions? They expect to get something. Everybody knows that.

Clinton responded with a poorly-received comment claiming that she received Wall Street money because she helped them rebuild after the 9/11 attacks. But the discussion about her campaign finance ties was only the back-end of the story. The debate was fundamentally over something called the Glass-Steagall Act. Sanders said that we should "reestablish Glass-Steagall," while Clinton said that bringing it back "is nowhere near enough" and "would [not] get the job done," while her "proposal is tougher, more effective, and more comprehensive."

Policy wonks and dedicated liberals may have heard these terms before, but to the average American, the discussion might as well have been in a foreign language. This is unfortunate, as the debate over this policy, and Wall Street regulation as a whole, represents one of the most important and least discussed issues of this election.

Two Types of Banks

There are two types of banks: commercial banks and investment banks. Commercial banks are what is most commonly thought of as a bank where customers can come and deposit or withdrawal funds from their savings account. The largest commercial banks are JP Morgan Chase and Bank of America. Investment banks, on the other hand, are banks that facilitate the selling and buying of financial assets like stocks, bonds, and derivatives. The largest investment banks are JP Morgan Chase and Bank of America. As you may have noticed, the largest commercial banks are also the largest investment banks. This type of bank, functioning as both a commercial and an investment bank, is called a "universal bank."

The universal banking model creates a number of perverse incentives. First, both commercial and investment banks can hold large amounts of capital and can be deeply intertwined in the financial system. So much so that they can sometimes reach the status of a "systematically important financial institution" (SIFI)-- or an institution that is so large that its collapse might initiate an economic meltdown. These institutions are commonly referred to as "too big to fail" banks, because they are literally too large and too important to the economy to be allowed to fail, even if the failure is because of their own mistakes. Holding such a status provides a bank with benefits: because they are so important to the economy, they can operate with the knowledge that they will be bailed out to prevent a recession if they ever fail, as congress would never be willing to risk a recession over one company failing.

When commercial banks with enormous amounts of capital are operating in tandem with deeply-intertwined investment banks, the combination often makes the institution an SIFI. That bank is now holding the financial future of thousands of Americans in its hand and gambling on the stock market at the same time. The status as an SIFI reduces the banks' risk costs when making investment decisions, encouraging them to take larger risks.

The benefits here are enormous: research conducted by the International Monetary Fund found that being designated as an SIFI lowers a bank's interest rate for borrowing money by 0.8%. In 2013, the Bloomberg Editorial Board estimated that such a subsidy was worth $83 billion dollars to the 10 largest banks in America. The number has likely grown since.

In essence, banks are able to hold Americans' savings hostage in order to demand access to taxpayer bailout money, so that they can mitigate their risks, and it benefits them to the tune of billions and billions of dollars every year. If their investments are successful, they get to keep the profits. If their investments go catastrophically wrong, the public absorbs the costs. This is how "too big to fail" banks privatize their profits and socialize their loses.

There's another problem: this cycle perpetuates itself. Because "systematically important" banks receives the advantage of lower borrowing costs, they can grow faster. As a result, they only become even larger and more systematically important, only further lowering the cost of taking risks. "Too big to fail" banks get benefits that other banks don't, and as a result, they only get bigger.

All banks with $100 billion or more in assets made up 17% of the banking industry in 1995. Today, they make up 59%. Just the five largest banks alone make up 44.6% of the industry, and it seems likely that they could officially take over a majority of it within a decade. The consolidation of banking clearly is not only the result of the repeal of Glass-Steagall, as the phenomenon predates it: the number of commercial banks in America has been declining every year since 1984, even as the size of the industry has been skyrocketing. Giving America's largest banks an $83 billion dollar or more bonus every year undoubtedly contributes to the banks that are already "too big to fail" growing even bigger.

There's another way that universal banking allows investment bankers to gamble with others' money. When they merge, the investment portions of the bank can use the commercial portion to cover their investments. For example, say the investment bank makes a risky speculative investment. To protect against potential losses, they want to purchase a credit-default swap, which is basically a form of insurance on financial assets. With both houses under the same roof, investment bankers can easily convince the commercial bankers to issue that swap to them and secure it with money from depositor savings. If the investment goes well, both the investment and commercial portions of the bank benefit. If it fails, the investment bankers pass the losses on to the commercial bank.

Either outcome is fine, as losses by commercial banks can be mitigated by government help in the form of FDIC insurance and access to the Federal Reserve's Discount Window. Financial Consultant R. Rex Chatterjee notes that letting investment banks take indirect advantage of government benefits meant for commercial banks creates a moral hazard, as it "could artificially enlarge the banks’ appetites for risk, to their own detriment and that of the global financial system." Again, if it all goes right, the bank keeps the profit, but if things go too wrong, the government will cover the losses. What reason is there to be careful?

It was with the goal of preventing these issues that Glass-Steagall was passed.

What is Glass-Steagall?

The "Glass-Steagall Act" refers not to a piece of legislation, but four sections of the Banking Act of 1933. The law was passed as Congress sought ways to prevent a crash similar to the Black Tuesday crash of 1929 that sparked the Great Depression. The provisions that make up what is referred to as "Glass-Steagall" mandated that commercial and investment banks remain separate, thus eliminating the perverse incentives mentioned above and making the formation of too big to fail banks extremely difficult. Commercial banks dealt with savings accounts, investment banks dealt with the stock market, and the two had limited connection to one another. Though tweaks to the law chipped away at its strength in the 1970's-1980's, it remained largely intact for decades.

Starting in the 1990's, however, that changed. A push to altogether repeal the most critical pieces of Glass-Steagall started in the 1980s, and continued even after the regulation was effectively finished off by a rule change in 1996. The turning point in the battle was when the commercial bank, Citicorp, and the financial services firm, Travelers Group, merged into Citigroup in 1998. At the press conference announcing the merger, Co-CEO John Reed joked that they wouldn't have any troubles with the law, since fellow Co-CEO Sanford Weill "will call up his friend, the President" and settle it all out. The leaders of Citigroup, along with the rest of the financial services industry, then launched an enormous campaign to get Glass-Steagall repealed before it kicked in and required them to restructure their bank.

About six months later, the $300 million dollars spent by the finance industry over 20 years to repeal the regulation paid off in the form of the Gramm-Leach-Bliley Act. The law passed through both the House and the Senate with massive majorities and was signed by President Bill Clinton, thus putting an end to Glass-Steagall. Representative John Dingell, one of the votes against the act, warned on the floor of Congress that:

...what we are creating now is a group of institutions which are too big to fail... Taxpayers are going to be called upon to cure the failures we are creating tonight, and it is going to cost a lot of money, and it is coming. Just be prepared for those events.

As it turned out, his prediction was correct.

The Crash

In 2007, the stock market crashed, causing the worst recession since the Great Depression. In 2009, unemployment reached the highest level in 26 years (10%) and GDP growth reached its lowest level in 63 years (-2.8%).

Whether or not the repeal of Glass-Steagall contributed to the stock market crash of 2008- and, thus, the following recession- is a hotly debated topic among economists and finance experts. The consensus seems to be that it likely did contribute to the conditions that made the crash possible, but it was not the single largest determinant.

I spoke with Mike Potter, now a professor of public administration at Appalachian State University, who wrote part of the Gramm-Leach-Bliley Act while working with the American Banking Association (America's largest banking lobby). He told me that the legislation "made sense" to him at the time, but that, in retrospect, it was an "awful, awful policy decision" that "absolutely contributed to the 2008 economic crisis." He now thinks Glass-Steagall should come back into effect, along with none other than Sanford Weill- the former Citigroup CEO who led the charge for its formal removal in the first place- and his former co-chair, John Reed, who recently called universal banking "inherently unstable and unworkable."

A number of commentators, including Bill Clinton himself, make the technically true but misleading claim that there is no evidence that the repeal of Glass-Steagall caused the crash. Alan Blinder, an economist in Bill Clinton's administration and a current adviser of Hillary Clinton, posed the question like this: "What bad practices would have been prevented if Glass-Steagall was still on the books?" The answer is "none." But this misrepresents the position of the law's supporters. Most supporters of Glass-Steagall take a position best summarized by Investor and Market Analyst Barry Ritholtz: the repeal of the law was "not a cause, but a multiplier."

Gramm-Leach-Bliley did not cause the crash: the crash was caused by a variety of other bank activities that ranged from stupid to downright evil. What repealing Glass-Steagall did do, however, was subsidize risk-taking for many banks by granting them SIFI status and allowing them other unique benefits. It allowed banks to operate with significantly less concern for the long-term stability of their investment decisions, thus encouraging the type of behavior that did cause the crash. So while it may be true that repealing Glass-Steagall did not cause the crash, it is also true that the damage caused by the crash would have been less significant had it never been eliminated.

Critics of Sanders' focus on Glass-Steagall are right in saying that bringing it back will not be enough by itself. Many critically important aspects of banking and finance wouldn't even be touched by its re-implementation. Other measures, many of which appear in Hillary Clinton's Wall Street reform proposal while being absent from Bernie's, will be important as well. But if Clinton was claiming that it was her solution to fix too-big-to-fail that was "tougher, more effective, and more comprehensive" than Sanders', her claim is laughable.

Clinton's Alternative

In the place of reinstating Glass-Steagall to break up "too big to fail" banks, she suggests "charg[ing] a graduated risk fee every year on the liabilities" of large banks, growing larger as a bank's risk does. Her "tougher, more effective" solution is to ignore tackling the root of the issue and instead try to tax the problem away. This Pigouvian policy would still allow "too big to fail" banks to exist, it would just try and discourage them from getting much bigger or engaging in too much risk. In order for it to work properly, the Clinton administration would have to constantly measure and quantify the level of risk that different big banks are engaging in and what a prohibitive cost looks like to each individual bank. The policy's relative complexity is itself a serious problem, not to mention the fact that it doesn't solve the earlier-mentioned way that investment banks can use commercial banks to cover their risks.

The rest of her solution focuses on a law that was already passed in an attempt to better regulate banks after the 2007 crash- the Dodd-Frank Act. According to her proposal, "She would veto any legislation that attempts to weaken the law and would fully enforce its protections." Even though this isn't actually a policy suggestion (enforcing the law is literally just the president's job description), the general sentiment is nice. The Dodd-Frank Act is a massive collection of small policy changes, most of which would improve the stability and health of our financial system. The problem is that the law is absurdly complex.

Within the act, the policy aimed at doing Glass-Steagall's job is called the "Volcker Rule," which aims to regulate banks' activity instead of bank structure. The rule is itself absurdly complicated. An original draft of it was described by a banker who supported Dodd-Frank as a whole as "unintelligible any way you read it." R. Rex Chatterjee compared its attempts to create definitions that work properly to trying to draw lines in the sand during the middle of a sandstorm. Bureaucratic deliberation and stalling and obstruction from the banks made it so that the final version of the rule took five years to make, and it now stands at 71 pages in length. For comparison, Senator Elizabeth Warren's proposal to reinstate Glass-Steagall is 30 pages long.

A law being complex doesn't necessarily mean that it's bad, but when dealing with businesses, it does mean that it is less likely to be quite as effective. There are entire teams of lawyers actively looking for loopholes and weak enforcement points. Not to mention the fact that increasing complexity increases the importance of regulators in making the policy work, and businesses actively lobby for the President to appoint regulators that serve their interests.

When it comes to the Volcker Rule, the sheer number of issues with implementing and enforcing it might make it an incredibly weak substitute for Glass-Steagall. It also fails to address the moral hazard in letting investment banks use commercial banks to their advantage. Why not just chose the incredibly simple policy that worked for decades?

A Clinton White House on Wall Street

Along with lacking some of Glass-Steagall's elimination of perverse incentives, Hillary Clinton's highly bureaucratic solution to too-big-to-fail would require a very trustworthy executive and low levels of corruption in order to work properly. On Wall Street policy, however, she can not be trusted with providing those requirements.

Clinton has many, many friends on Wall Street. Over her career, four of her five largest campaign donors have been banks. So far for this campaign, both JP Morgan Chase and Bank of America appear on the list of her top 20 campaign donors. Even as she advocates for expanding the Volcker Rule to hedge funds, she's received more donations from hedge fund employees than Jeb Bush and Marco Rubio combined. As Sanders pointed out, "Why do they make millions of dollars of campaign contributions? They expect to get something."

Reviewing her record, it's clear that she's stayed out of her banker friends' business. She's paid very little attention to issues regarding the regulation of Wall Street throughout her career, and provided little help even when she did pay attention. Even when it came to the Dodd-Frank Act, her participation was minimal: "The bill’s main sponsor, Sen. Christopher Dodd... praised 13 other Senators for their help. Clinton’s name wasn’t among them." Perhaps most damning of all, Clinton privately spoke to Bush's Treasury Secretary about allowing a group of investors led by personal friends of hers to take over AIG as it was collapsing. She has proven herself as a friend of Wall Street over and over again during her career.

You can't become as successful in Washington as someone like Clinton, for as long as she has, without doing some favors. To entrust her with regulating Wall Street would be letting the wolf's friend watch the sheep. When it comes to ways to fix America's too-big-to-fail banking problem, the simplest option is the best: break up investment and commercial banking.