Volcker: Keep Banks Small Enough to Fail


I’d sort of forgotten that Paul Volcker had been tapped by Barack Obama to lead a special advisory panel on the financial crisis. But now I remember, and it seems a separate Volcker-led group has come up with recommendations for financial system reform:

The report offered 18 recommendations that would insert government regulators into the boardrooms of financial institutions as never before. The plan calls for vastly increased oversight of major banks, going as far as to recommend the end of an era of mega banks whose size makes their failure potentially catastrophic to the global financial system. To limit their size and scope, banks, the document states, should be prohibited from managing private-equity or hedge funds. And deposits should not be concentrated in the hands of too few banks.

“Keep them small, so that any failure won’t have systematic importance,” Volcker said at a news conference.

These seem like good ideas to me, but naturally not everyone agrees: “elements of the plan were already opposed Thursday by some in the financial industry, where some worry that the push for tighter government regulation may go too far.” I suppose the natural thing to wonder about that is what would going too far mean in this context? Would going too far lead to a major financial crisis requiring trillions of dollars in bailouts around the world? Double-digit unemployment? I mean, what are worried about?

UPDATE: Note, of course, that this is what I’ve been saying for a while. Elliot Spitzer, too.