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Too Big for Comfort

Why we need to break up the banks.

Jun 4, 2012, Vol. 17, No. 36 • By JAMES PETHOKOUKIS
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What about just getting Washington out of the banking business entirely? No deposit insurance for investors. No Federal Reserve as a lender of last resort. Lenders would be more vigilant, bank execs more scared, moral hazard eliminated. But explaining to the American public the need to do away with these two longtime features of both the American economy and advanced economies globally would take time, time we may not have. And if a crisis should occur, politicians would still be strongly tempted to start cutting checks. And America cannot afford another economy-crushing financial crisis, not now and probably not for years. In 2007, publicly held federal debt as a share of national economic output was 36 percent. In 2012, it will be roughly double that level, 73 percent, and likely heading even higher. And once you add what Uncle Sam owes in social insurance entitlements, total U.S. debt is bigger than the entire economy, 103 percent of GDP. That amount of indebtedness is well past the 90 percent level identified by economists Carmen Reinhart and Kenneth Rogoff as a serious drag on long-term growth. And like the debt, unemployment is also already at an intolerable level and likely to remain historically high for years to come given the slow pace of recovery.

Also unlike those ideas on libertarian wish lists, breaking up the banks has some actual legislative momentum thanks to JPMorgan’s huge trading losses on its botched hedging strategy. Banking analyst Jaret Seiberg of Guggenheim Securities’ Washington Research Group calls a bipartisan bank breakup movement along the lines Hoenig outlines both a “serious threat” and the top issue facing the sector for the rest of the year. “The Republican response to Dodd-Frank’s overkill is to break up the banks. The far left also wants to break up the big banks. The issue with the JPMorgan hedging mess is that it empowers the far left and the far right to pursue their agendas while the silent majority in the middle ducks for political cover.” In fact, what banking analysts call a “serious threat” should strike those outside the management of big banks​—​left, right, and center​—​as a “serious opportunity.”

Breaking up the biggest banks would allow markets to work better, by cutting down on crony capitalist rent-seeking by big money from big government. It would also reduce the moral hazard created by Washington’s too big to fail policy. Ending too big to fail isn’t a policy conservatives should shy away from​—​even if some on the left support it too.

James Pethokoukis is a columnist and blogger at the American Enterprise Institute and a contributor to CNBC.

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