Friday, December 18, 2009

Should we break up big banks?
Mike Rappaport

My view is that we should not allow any bank that is too big to fail.  That suggests breaking up the existing big banks.  The harder question is what one does about a smaller bank that grows.  We should not allow banks to merge into banks that are larger than the limit, but when they just grow through successful business, that is a harder matter.  (Perhaps, one would just require that they have larger, perhaps much larger, capital requirements as they grow.)

Arnold Kling makes the argument here in these this post.  Even more interestingly, here he explains to liberals why the political parties do not advocate this sensible policy.  

Update:  A commentator argues that we should instead just eliminate taxpayer rescue of banks.  I would agree that this would be the best result (see Arnold Kling's post I linked to), but I just don't think our political system would allow it.  Given that, eliminating all of the "too big to fail" banks is actually the way to get rid of taxpayer rescue.

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Mike Rappaport



Posted by: dearieme | Dec 18, 2009 2:32:45 AM

Mike, isn't it break not brake?

Posted by: Jeff Baumgarten | Dec 18, 2009 3:40:57 AM

No bank is too big if:
They dont have an investment bank attached.
They dont sell insurance.
They dont have leverage above a normal bank.
And they don't take on too much risk and expect to insure the risk with derivatives.
They don't speculate.

Posted by: athena | Dec 18, 2009 5:44:33 AM

The key is removing the taxpayer rescue of banks that get into trouble. Right now, not only does management of a given bank know that they'll be rescued but so do those who trade and invest with that bank. Take away the safety net and investors and traders will naturally spread their money among a wider circle, creating a block against a single institution becoming too large.

An added benefit will be to force investors to do a better job of due diligence... if traders can't count on the government to bail them out, they're going to be more careful about with whom they decide to trade.

Posted by: steve sturm | Dec 18, 2009 5:59:19 AM

Maybe he meant brake. You know, slow them down from imploding.

Posted by: John Jenkins | Dec 18, 2009 8:13:47 AM

Muphry's Law: Among other things, it asserts that "if you write anything criticizing editing or proofreading, there will be a fault of some kind in what you have written."

Posted by: Richard Clark | Dec 18, 2009 9:32:20 AM

Sorry about the usage of the wrong "break." But surely there was more of interest in the post than the spelling.

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