The real effect of Gramm-Leach-Bliley was political, not directly economic. Under the old regime, commercial banks, investment banks, and insurance companies had different agendas, and so their lobbying efforts tended to offset one another. But after the restrictions were lifted, the interests of all the major players in the financial industry became aligned, giving the industry disproportionate power in shaping the political agenda.
Read the whole thing. He reinforces some points that I have been making, for example, that a pro-business government is not the same as a pro-market government. Also, that we have never really debated whether the claim that the collapse of Chauffered America would have ruined the rest of America.
We thus stand at a crossroads for American capitalism. One path would channel popular rage into political support for some genuinely pro-market reforms, even if they do not serve the interests of large financial firms...
The alternative path is to soothe the popular rage with measures like limits on executive bonuses while shoring up the position of the largest financial players, making them dependent on government and making the larger economy dependent on them.
He says that the Obama Administration is intent on choosing the latter path. I agree.
The litmus test is what happens with mortgage credit. The pro-market approach would allow the market to decide whether to securitize mortgages or return to the originate-and-hold model. It would allow the market to decide the interest rate on mortgages. Freddie Mac and Fannie Mae would be phased out, at least as government-run or government-subsidized entities.
Zingales' essay nicely summarizes some fundamental issues.