Simon Johnson vs. Paul Krugman on Whether to Break Up "Too Big to Fail" Banks:
by Miles Mogulescu
Paul Krugman and Simon Johnson are two of my favorite economic commentators.....
But when it comes to one of the central issues of our times--whether or not to break up the biggest banks which now control assets totaling more than 60% of GDP--Johnson and Krugman take dramatically opposing positions. Johnson says that shrinking Too Big To Fail ("TBTF") banks is essential to our economic and political future. Krugman says it wouldn't solve our problems.
In his Huffington Post Book of the Month 13 Bankers (co-written with James Kwak) and in his blogs on Baseline Scenario and Huffpo, Johnson (former Chief Economist for the International Monetary Fund and an MIT Professor) makes the case, in clear and compelling terms, why, in addition to regulatory reform, breaking up the biggest banks is vital to preventing the next round of economic boom and bust and the next round of multi-trillion dollar taxpayer funded bailouts.
In contrast, Krugman's recent New York Times columns and blogs argue that the size of the largest financial institutions is largely irrelevant and the solution lies in new regulations alone.
Krugman seems to think tighter financial regulation and breaking up TBTF banks is an "either/or" proposition. Why? Johnson's "both/and" approach makes much more sense.
Krugman may have the "pragmatic" short-term politics sized up correctly--President Obama and his Wall Street-friendly team of Summers/Geithner/Emanuel and crowd want to tinker with regulation on the margins while leaving the fundamental pre-meltdown structure of the financial system intact, so they oppose measures to shrink the TBTF banks and tend to marginalize people who advocate it. Krugman's tact seems to be to not alienate the administration and to suggest ways to improve their regulatory tinkering.
But Johnson has the long-term politics right--unless we break up the 6-8 largest banks which dominate the financial system, we will both be strengthening a self-perpetuating oligarchy which dominates the political system to protect its own wealth and power to the detriment of the national interest and democratic governance, and which uses it's government guaranteed "too big to fail status" to take excessive risk which will lead to the next bubble, the next meltdown, and the next Hobson's choice by an even more debt-ridden government between bailing them out again with trillions in taxpayer dollars or allowing them to fail and sinking the economy into depression.
"The Wall Street banks are the new American oligarchy-- a group that gains political power because of its economic power, and then uses that political power for its own benefit. Runaway profits and bonuses in the financial sector were transmuted into political power through campaign contributions and the attraction of the revolving door. But those profits and bonuses also bolstered the credibility and influence of Wall Street; in an era of free market capitalism triumphant, an industry that was making so much money had to be good, and people who were making so much money had to know what they were talking about. Money and ideology were mutually reinforcing.
This is not the first time that a powerful economic elite has risen to political prominence. In the late nineteenth century, the giant industrial trusts -- many of them financed by banker and industrialist J. P. Morgan -- dominated the U.S. economy with the support of their allies in Washington, until President Theodore Roosevelt first used the antitrust laws to break them up."
http://www.huffingtonpost.com/miles-mogulescu/does-size-matter-simon-jo_b_534699.html
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