It really does seem like if even Alan Greenspan is coming around to the view that we shouldn’t allow financial institutions to grow to such enormous sizes that we really shouldn’t allow financial institutions to grow to such enormous sizes. What’s a lot less clear to me is what you can actually do, in practical terms, moving forward. Now if only someone like Alan Greenspan had been voicing these concerns back in the 1990s it would have been easy enough for regulators (like, you know, Alan Greenspan) to deny regulatory approval to the kind of mergers that gave us the superbanks of today. But while regulators can prevent big firms from merging and becoming super-big, I’m pretty sure they can’t just order Bank of America to unmerge itself.
This, I think, is one of the main reasons you hear more about breaking banks up from people talking to newspapers than you do from policymakers. What, exactly, are Ben Bernanke and Tim Geithner supposed to do at this point?
Which is why, I think, the idea of enhanced capital ratios and special fees is actually a pretty good idea. Greenspan says “I don’t think merely raising the fees or capital on large institutions or taxing them is enough.” He thinks we need to actually break them up. But raising fees and capital requirements can be a way of doing this. The point would be to make the fees and requirements onerous enough that the managers of large financial institutions find it worthwhile to start finding ways to spin things off and shrink. That would produce the goal of smaller firms without having the Treasury Secretary personally step in and reorganize the commanding heights of the economy. The test is that if the fees are imposed and banks don’t start doing this, you need to come back and raise the fees. The fees need to be high enough to generate substantial fee-avoiding behavior, you can’t just say “well, we’ve got some extra revenue so it’s all good.”