How Can Trump Support Deregulation <i>and</i> Glass-Steagall?

The Republican platform's proposal to reinstate Glass-Steagall is hard to understand, even in the confused policy mishmash created by Donald Trump. The best interpretation is that it's an awkward outreach to the disappointed "progressive" supporters of Elizabeth Warren and Bernie Sanders. The worst is that it calls into question whether Donald Trump really supports financial deregulation.

The key problem for those Republicans who are now warily supporting their presidential nominee is that it is not clear where he will lead the party in this election—and the country—if he wins. Is he committed to anything, really, or is he just twisting and turning to win the presidency, only to decide later what he wants to do? In this sense, favoring the reinstatement of Glass-Steagall is a bad omen.

Glass-Steagall was modified in 1999—permitting bank holding companies (but not banks themselves) to engage in the securities business—for a simple reason. Since the mid-1980s, the securities markets had been outcompeting banks in the business of financing corporate America. The reasons for this are complex, but have much to do with advances in communication technology.

As it became possible for investors to get full financial information about companies directly from the files of the SEC, they could decide for themselves what investments to make. The traditional intermediary role of banks—taking deposits and making commercial loans—was eroding quickly. It was far less expensive for a firm in need of credit to sell bonds, notes or commercial paper to investors than negotiate complex financing arrangements with a bank.

If that trend continued, banks would eventually be forced out of financing all but the smallest businesses. This had been predicted in the Reagan administration, when the idea of modifying Glass-Steagall was first proposed. These competitive issues had become obvious by 1999, providing the foundation for the repeal of the Glass-Steagall language that prohibited affiliations between banks and securities firms. Since then, the gap between bank and securities market financing has only grown wider, but at least banking organizations—through their securities affiliates—have been able to compete in this market.

Glass-Steagall reform added major new competitors to the securities markets, further reduced investor costs and spurred innovation. As important, it also enabled banking organizations to compete again for the financing business of their traditional corporate customers. For most banking organizations today, their securities operations are their most profitable activities. Smaller securities firms are bearing the brunt of this competition, but more deregulation will bring back the IPO market, which is their natural role.

Reinstating Glass-Steagall will reverse this process. Banking organizations will again be frozen out of the securities markets. They will become less profitable and less able to support their subsidiary banks, making bank failures and taxpayer bailouts more likely.

Those who advocate the reinstatement of Glass-Steagall should be careful what they wish for.

But it is the symbolic importance of reinstating Glass-Steagall, endorsed by the Trump campaign, that should concern us. Trump and some of his "free market" advisers have proposed deregulation of the economy, including a repeal of the Dodd-Frank Act and a temporary suspension of all new regulations. Good. That, plus a sensible tax policy, will restore the economic growth that the Obama policies have suppressed.

But how can we believe any of this? More than anything else, the reinstatement of Glass-Steagall suggests that the government, and not private decision-making, should determine the structure of the economy. One can't believe in the reinstatement of Glass-Steagall and still believe in the repeal or significant modification of Dodd-Frank. It's like saying free markets work, but price controls can help.

One of the key arguments that Donald Trump has advanced to secure the support of Republicans is to assure us that if he's elected he will appoint Supreme Court Justices in the mold of Antonin Scalia. However, the author of "The Art of the Deal" has also presented himself as a dealmaker. He wants to improve trade arrangements that have already been formalized in treaties, start another reset with Vladimir Putin and extract more financial support from NATO nations and those we protect in Asia. This will be dealmaking indeed.

But what happens when his Supreme Court nominees are opposed by the Democrats in Congress? Will dealmaking produce someone closer to Justice John Paul Stevens than Justice Scalia, or can Mr. Trump be relied upon to stay the course?

The Trump proposal to reinstate Glass-Steagall—only a technical idea of no particular consequence to most American voters—has major implications for the credibility of the candidate in whom so many Republicans have now placed their trust. Like the canary in the coal mine, it's small but significant.

Peter J. Wallison is the Arthur F. Burns fellow in financial policy studies at the American Enterprise Institute. He is the author of "Hidden in Plain Sight: What Really Caused the World's Worst Financial Crisis and Why It Could Happen Again."