“How” Is a Big Problem

James Bullard

Like a lot of people, I’m attracted to the idea that it would be desirable to “break up” “big banks.” But over the past eighteen months I’ve learned that it’s one thing to say that we should break up big banks, and another thing to say exactly what this means, how it would work, who it would apply to, and in general what would actually happen. Unfortunately, as a generalist blogger I’m not that well-situated to develop anything resembling a concrete workable proposal. Which is why I find these kind of statements from the regional Fed presidents of Middle America slightly frustrating:

James Bullard, president and chief executive of the Federal Reserve Bank of St. Louis, echoed the call of Kansas City Fed President Thomas M. Hoenig and Dallas Fed President Richard W. Fisher, telling reporters that the nation’s biggest banks should be busted up into pieces. The only impediment to doing so, he said, is how.

“If you had a clear road map, I’d be for it,” Bullard said Thursday at the Hyman P. Minsky Conference in New York. “If there was a good way to do so, if you had a clear road map about how you were going to go about it, and why you were going to break them up in this particular way.”

I suppose I agree with that, but “how” is not a minor issue here. The country would really benefit from one or more of these guys—who, after all, have some real expertise and credibility in the field of bank regulation—developing some kind of more specific idea that could then be subjected to specific scrutiny and/or gain support. The point is that “break up the banks” is a slogan, not a policy. And it was a good slogan for early 2009. But at some point you need a real policy, then you can go back to the slogan in support of the policy.

The most feasible thing I’ve heard would be to take something like the Obama administration’s proposed TARP tax and make it permanent and progressive. So banks would pay a fee based on the size of the assets under their control, and the rate would ratchet up as asset size increased. That would encourage today’s largest banks to break up, discourage second-tier banks from just mindlessly merging and growing, but still let people assemble large financial institutions if there’s really some efficiency to be gained.