Recently I read some stimulating pieces that I’d like to share with you, the first of which was written by economist James K. Galbraith as a statement before the U.S. House of Representatives’ Committee on Financial Services. (Full statement, click here.) I believe Mr. Galbraith really hits his stride in section number three, titled: “The bank plan will not work.” As he points out, “If we are in a true collapse of finance, our models will not serve and our big banks will not serve either. You will have to replace them both. Since several very big banks are deeply troubled, there is in my view no viable alternative to placing them in receivership, insuring their deposits, replacing their management, doing a clean audit, isolating the bad assets. Since these banks were clearly too large, in my view they should be broken up, and either sold in parts or relaunched as multiple mid-sized institutions with fresh capitalization and leadership.” I would encourage you to read section three of his statement, at least, and consider his arguments with a critical mind.
Another essay I would recommend is “The Quiet Coup,” by a former chief economist of the International Monetary Fund, Simon Johnson, in the May issue of The Atlantic. (Full essay, click here.) Please pay particular attention to the final section of the article, entitled “The Way Out.” Here, Mr. Johnson lays out a case very similar to Mr. Galbraith’s. I am particularly struck by his discussion about the inherent problems of gigantic-scale mega-banks:
“Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.
“Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.
“This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail explodes. Anything that is too big to fail is too big to exist.”
Recent Comments