When Goldman Sachs and Morgan Stanley ditched the investment banking model, it didn’t just mark the end of an era, it marked the end of Wall Street as we know it, the Wall Street Journal declares in an editorial today. And with investment banks gone, the US financial system will become sturdier, but a lot less innovative.
That’s not necessarily a bad thing; the system owes its downfall to its more dubious innovations. In some sense, investment banks were a “regulatory artifact” of 1933’s Glass-Steagall act, which first split investment and commercial banks. With it undone, hedge funds and private equity will try to fill the gap, but neither is a perfect substitute. Congress should do its best to build a sturdier system that can still innovate.