Print
E-Mail13 Bankers, the book that I co-write with Simon Johnson, was released one month ago. The book has gotten more attention than I had anticipated, for which I am grateful. Senator Christopher Dodd even told Don Imus that he was reading “13 Banks, by this other fellow,” although he later said this to Ezra Klein:
“I’ve looked at the 13 Bankers book, and so forth, that approach, and I hear this, by the way, not just from them, but from CEOs of major corporations. This is not some left/right question. But I just don’t think that it makes a lot of sense. I don’t think it’ll prevail.”
By far the part of the book that has gotten the most attention is the recommendation, in the last chapter, that our six largest banks be broken up and capped in size at 4 percent of U.S. GDP (with a lower limit for riskier or more interconnected banks). This idea has also been the target of many criticisms, from Paul Krugman (“Breaking up big banks wouldn’t really solve our problems, because it’s perfectly possible to have a financial crisis that mainly takes the form of a run on smaller institutions.”), Larry Summers, and Tim Geithner, among others.
In my opinion, however, the call to break up megabanks is not the central point of the book. Breaking up big banks is a solution, and one that I favor, but the more important goal of the book is to get people to agree on how to think about the problem–the financial system must be seen through the lens of politics–and on what the problem is: a financial system that is too big, too concentrated, and too politically powerful. And this is a message that, while certainly not one that we invented (it is far too obvious for anyone to claim ownership), has resonated widely.
Krugman himself puts it this way: “My view is that I’d love to see those financial giants broken up, if only for political reasons: it’s bad to have banks so big they can often write laws.” (He disagrees that breaking up megabanks would make the financial system appreciably safer.) Rob Johnson says the problem is that we have one too many markets: a “market for the purchase of the rules of the game.”
The debate over how to address institutions that are “too big to fail” is itself a debate over politics. The administration’s position is that the bill currently on the floor of the Senate solves this problem by giving the government the power to liquidate megabanks in a financial crisis without endangering the larger financial system; as a result, the argument goes, large banks will no longer enjoy an implicit government guarantee and the competitive advantages that come with it.
Skeptics, however, point to the risk of relying on a solution that depends on political will. In 13 Bankers, we wrote, “Even leaving aside the issue of direct pressure from bank executives who happen to be major political donors, it would be politically difficult for any president to order a government takeover of an iconic American bank that was insisting through the media and its lobbyists that it was perfectly healthy” (p. 206). Noam Scheiber adds, “authority to dismantle a firm and impose losses isn’t the same as the will to use it. . . . I have an easy time imagining a future Citigroup pleading that it shouldn’t be resolved because it employs hundreds of thousands of people, many of whom will be thrown out of work.” In The New York Times, David Leonhardt quoted a former government official saying, “Don’t kid yourself into thinking that if J. P. Morgan were on the rocks, it would disappear.”
Simon and I favor breaking up the large banks now because it reduces our reliance on the backbone of a future administration facing the next financial crisis. Scheiber thinks that it is politically infeasible to break up the banks now, and so resolution authority is the best we can get. Leonhardt, along with the International Monetary Fund (and perhaps even Tim Geithner), favors a bank tax that will increase the cost of risk-taking and provide the funds to rescue creditors in a future crisis.
But these are the right debates to have. There is no chance that a perfect regulatory system will come out of this session of Congress, especially since no one can know with certainty what a perfect system would look like. If we can at least recognize the political roots of any financial system and agree on what its core problems are, we have a chance at gradually adapting regulation to the demands of today’s modern, sophisticated financial system. That alone would be progress.
