Pethokoukis

Is BUBB (breaking up the big banks) now a ‘conservative imperative’?

You can add Red State’s Erick Erickson to the growing list of BUBB conservatives:

We have created a financial situation in this country, with Dodd-Frank and other policies, that have stacked the banks against the American people. They have become so massive that they can do pretty much what they want because they can hire all the lobbyists they need to get what they want from Washington and if they falter or fail, the nation goes belly up.

It is absolutely a conservative imperative to break up the big banks. Conservatism should eschew public-private partnership at this level. The banks have, in effect, become an extension of the government in that they now exist in a wholly symbiotic and unhealthy relationship with Washington. If we want smaller government, we need smaller banks too.

And count in Senator David Vitter, too. Here is what he wrote Ben Bernanke and the Fed:

Placing higher capital requirements on megabanks is a common sense way to fix the dangers of too-big-to-fail.  As you have said in the past, research done by the Federal Reserve and other regulators shows the tougher capital requirements will “significantly reduce the threat of a massive financial crisis” while doing little to limit economic growth. The mega banks should bear their own risks and have their financial incentives positively aligned in a way that protect the taxpayers.
Greater capital is essential to withstand inevitable losses in the banking industry.  In the 1920s and 1930s, the big New York banks funded 15 to 20 percent of their assets with capital.  This enabled them to survive the Great Depression.

Now both The Economist and former investment banker Douglas Elliott of the Brookings Institution recently argue against measures to break up the megabanks or nudge them into shrinking. The former highlights the practical problems and thinks
“ring fencing” the “retail and investment-banking arms of universal banks to have their own capital buffers” would suffice. Elliott seems to think we’ve more or less fixed the problem and offers this warning:

Finally, these restructuring proposals represent major, risky experiments. The probability of serious unintended problems is high and the transitional period would be especially fraught with peril. For example, there would be a dramatic shift of business towards financial firms that do not have much experience with the more sophisticated and trickier parts of finance. Unfortunately, there is a long history of medium-sized financial firms blowing up when they expand too rapidly into complex areas, with MF Global as a recent example. It is highly likely that such problems would recur.

It is true that there are risks and problems with a system that includes large banks. However, debate on financial reform often takes as a given that there are only problems and costs, whereas the economic benefits are actually substantial. It is difficult to quantify, but I am confident that the economic benefits of these firms will outweigh their costs in the future under the new regulatory regime. At a minimum, we should certainly be very careful to balance both costs and benefits when considering any of these restructuring proposals.

Seriously? I think we have seen the costs of the current Too Big To Fail experiment and they run into the trillions. And those risks still remain. The TBTF experiment continues. Here is Thomas Hoenig of the FDIC, who has proposed his own BUBB plan, on the costs and benefits:

Finally, even if there are economies of scale or scope, it does not necessarily mean that banks should be allowed to continue to conduct all of their current activities. Whether they should depends on comparing the marginal benefits from the reduced private costs of operation to the social costs associated with financial crises. Given the large costs of the 2007-9 crisis, the efficiencies and cost benefits of size and scope would need to be extremely large.

The Economist and Elliott also seem to ignore the huge rent-seeking and public choice problems of having a such massive amount of concentrated economic power in a position to influence Washington — both politicians and regulators.

This idea is not going away. While there may be disagreement on the exact way of downsizing Big Finance, there is growing agreement over the goal.

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