More On Breaking Up The Banks

Back on the soapbox about breaking up the banks.

At The Baseline Scenario, Simon Johnson restates his case for restructuring the banking sector:

If Secretary Geithner’s scheme works, we draw the lesson that our banks became too big and we aim to make them smaller relative to the economy moving forward.  The regulatory agenda currently in progress – including for discussion at the G20 next week - would do essentially nothing to reduce the political power of big banks.  We need simple caps on bank size, leverage relative to the economy and – this is harder – measures of interconnected tail risk (i.e., is everyone making the same kind of crazy loans?).  Design a system with this in mind: regulators get captured and super-regulators get super-captured.

If the scheme doesn’t work, we draw the exact same lesson.  And, of course, we should expect Chairman Bernanke to move forward with his Plan B (or is it Plan Z?): inflation.

There is little discussion of this subject that I have run across either in the MSM or the blogosphere. None of the discussions within Congress seem to be following this line. Indeed, the political approach is sadly predictable — write more rules and protect your donor base.

The surest way to relive this crisis is to leave the current structure of the financial system in place.

more: here and here (previous posts)

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