The Glass-Steagall Act of 1933 was created to make sure average citizens' savings were not lost in investment banks' mistakes. The act lasted for decades, but was repealed in the '90s after tremendous lobbying from Wall Street. Since the financial crisis of 2008, there have been voices from across the board calling for the reinstatement of Glass-Steagall. The only problem is, the legislation wouldn't have prevented the financial crisis of 2008, and it won't prevent another one.

The situation
Without making this too much of a history lesson, let's define the Glass-Steagall Act in a nutshell as the separation of commercial banks and securities firms. It was effectively a dual banking system: one for loans and traditional banking, and one for investment and securities banking.

The act was officially repealed in 1999 after relentless lobbying, though many considered it to be defunct before the official repeal. In 1998, Citibank and Smith Barney were cleared to become affiliates, prompting President Clinton to declare the Glass-Steagall Act "no longer relevant."

Since then, banks consolidated into the "too-big-to-fail" organizations we see today. After the financial crisis, lawmakers, pundits, and anyone with a keyboard touted the reinstatement of Glass-Steagall as the answer to the issues facing our banks. There are some merits to reinstating the laws, but not as pervasive as one might think.

An alternate reality
Let's say Glass-Steagall had been reinstated, or was never even repealed. As Andrew Sorkin said in a New York Times article, Bear Stearns' and Lehman's collapses would still have occurred, as they were strictly investment banks. When Merrill Lynch was taken under Bank of America's (NYSE: BAC) wing, it, too, was only an investment bank and would not have been saved by Glass-Steagall. The biggest bailout member, AIG (NYSE: AIG), was an insurance company, an industry not even mentioned in the legislation. You see my point.

Yes, the commercial banks were involved in complex derivatives and a series of other things they should have never touched, but it wasn't what created the collapse. Bank of America's biggest mistake was buying Countrywide Financial, an event now being touted as "the worst deal in the history of American finance." So even if Glass-Steagall had been around for these events, it doesn't look like things would have turned out much differently.

An answer?
None of what I have said is trying to suggest that no change is needed or warranted. I would be the first to agree that big banking has become an uncontrollable monster, something even CEOs cannot manage. When I speak with friends from Citigroup (NYSE: C) or Bank of America, they are in awe of their companies' sheer size and scale. How could something so bloated ever be controlled, especially by one person?

It's with that in mind that I don't blame Jamie Dimon for the massive trading losses at JPMorgan (NYSE: JPM). Yes, it was a poor decision fueled by greed and then fear, but can Dimon be expected to stay on top of every issue concerning a $130 billion company with 260,000 employees around the world? Understand, I am not exonerating anyone from wrongdoing, but I believe there needs to be clarification regarding the beasts with which we are dealing.

Greater executive oversight will improve the transparency of public companies and ultimately aid shareholders and Main Street. Banning black-box trading would give power back to the average trader (though I think investors are basically immune from this practice to begin with). Contingency plans for the big banks will give the country an idea of what will happen if too-big-to-fail fails. But none of these things will prevent financial crisis 2.0. Patchwork does not cure systemic error.

Sort of
The answer to our nation's financial woes begins far away from Wall Street and the White House. It involves every single person in this country. It is the most difficult of all the answers, because it requires genuine change, a change in philosophy. As a recent Internet meme stated: "To blame free markets for the failures of crony capitalism is like hating love because of the existence of adultery."

What needs to change is us. We created the systems that drive the world, and the systems are not flawed. We just aren't using them the way we're supposed to. We must learn that homeownership is not an American ideal; it's just another option. We need to see that credit cards are not easy ways of getting new toys, but instead high-interest lending machines. When we treat our financial system with the respect it requires, we'll see fewer crises.

The goal of free markets is to drive innovation and create an exchange where each party brings their trade to the table. It's a system that benefits all who participate, and ultimately furthers the nation, not just the 1%.

Duh
I realize these are not novel ideas, and I realize this is idealism at its best (or worst). I don't expect these things to happen, but I also don't expect the problems facing us today to be fixed in any meaningful manner.

We must first learn that recycling legislation or creating new rules is not the answer. Only from there can real change begin.

If you would like to learn more about some potential opportunities and threats from the coming 2012 election, click here for strategies on how to protect, and grow, your wealth no matter which candidate wins in November.