How Big Should the Banks Be?

By Gonzalo Schwarz
Simon Johnson has a piece at Bloomberg today that urges the Romney/Ryan ticket to make reining in the big banks a major campaign issue. (Thanks to Michael Brendan Dougherty.)Oddly enough, Johnson makes some good points. (Forget his stuff about how great Teddy Roosevelt’s trust-busting was, and that the firms in question were exploiting the consumer; prices were falling in the industries he targeted.) The big banks do indeed receive market-distorting subsidies of various kinds, the result of which is that they grow bigger than they would otherwise be.If anything, Johnson is being too timid. The Federal Reserve System itself is a subsidy to the banking system (what could be more obvious?), but no mainstream economist is going to say so.Various proposals are being put forward, including raising capital requirements on the largest institutions. This would force them to rest on a sounder footing, the argument goes, and would counter the incentives to be reckless that their too-big-to-fail status encourages.I am not sure exactly how to deal with the present condition of the banks apart from root-and-branch monetary reform, but I wouldn’t rule out a proposal like this one as a second-best alternative. No doubt some people will claim that it’s a violation of the free market to impose common-sense controls on financial institutions. But how so? These institutions enjoy various forms of government privilege, and commercial banks even have FDIC coverage. They are shielded from the free market, which means their behavior is not the behavior they would engage in on an actual free market...  Continue reading at

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