Breaking up the Big Banks

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"Breaking up the Big Banks"

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My biggest concern about the PPIP approach to the banking system is that even if it works, what it does essentially is return us to the pre-crisis status quo—banks that are so large that they’re too politically powerful to regulate effective and too systemically important to be allowed to fail. That’s a recipe for dishonest transactions that produce short-term profits at the cost of blowups. One appealing element of nationalization is that it can easily be made to end in a world in which there is no institution named “Bank of America” or “Citi” and no such gigantic institution. That said, the PPIP approach doesn’t preclude taking a hammer to the institutions. And as Simon Johnson says something has to be done:

In any case, our top political leadership needs to really sell some version of the following message. We let the banks get out of control and the cost will be enormous; our debt/GDP ratio will in all likelihood rise from around 40% to over 80%. We cannot afford to have the same problem again. We must break the power of banks before they break us all. And if you don’t think banks can do that much damage to economies, just look around outside the United States – the world is full of countries where growth is slowed or distorted by a financial system that becomes too powerful. This is not about tweaking the existing U.S. regulatory system; it is about complete change and – in many senses – turning back the clock to a financial system that was simpler, smaller, and much less dangerous.

Unfortunately, I thus far see relatively little indication that the administration is thinking along these lines. Instead, they seem to me to be inclined to remain living in a world populated with banks that are “too big to fail” and “too complicated to nationalize” but try to somehow regulate them better. This is, I think, a strategy doomed to failure over the long run.

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