For the past year, former Federal Reserve Chairman Paul Volcker--head of the president's external advisory committee on financial reform--has been thinking carefully about the roots of the financial crisis. He has reflected on a regulatory structure, the Banking Act of 1933, frequently referred to as the Glass-Steagall Act, that worked pretty well for several decades until it was undermined by innovation and the lobbying efforts of financial market participants. The conclusion he has reached is that the best way to regulate the financial system going forward is to go backward to a framework mandated by Glass-Steagall that isolates commercial banking from investment banking and other risky activities.

The only viable solution, in the Volcker view, is to break up the giants....