"Where enterprise leads," wrote British economist Joan Robinson in 1952, "finance follows." But now finance has led industry-into a ravine. It didn't start with the recent missteps of bankers, rating agencies, and mortgage brokers. Finance has been on the wrong trajectory for more than a half- century: The current crisis has deep historical roots in financial theories that regarded diversification as a substitute for due diligence-and in a dysfunctional regulatory system.rnCommercial banking's diversification, its expansion beyond traditional lending, has been disastrous. What's needed now is a Glass-Steagall Act for the 21st century-rules requiring banks to focus simply on taking deposits and granting loans. This would protect depositors, limit financial-risk contagion, and allow the FDIC and the Federal Reservernto do what they do best. Others - hedge funds, private equity firms-would face no further regulation.
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