"It was not so much deregulation that caused the crisis," Niall Ferguson wrote in his 2009 report "Too Big To Live," "as excessive concentration, combined with regulatory capture or regulatory arbitrage as the big banks schmoozed their supposed supervisors or shopped around for the softest touch."
More than a year after the global financial system stood on the edge of collapse, what has been done to break apart the major banks? Who is following Paul Volcker's recent recommendations in the New York Times? Financial regulatory reform is at an impasse; Barney Frank's legislation passed the House on a party-line vote in December; in the Senate, Chris Dodd hit a roadblock in negotiations with Richard Shelby, and is now trying to negotiate a bipartisan agreement with Bob Corker instead. Even if Dodd and Corker's bill passes in committee, however, there is no guarantee it will pass the Senate -- Harry Reid could always decide to replace it with his own legislation!
Step one in reforming the financial system is ending the explicit and implicit taxpayer guarantees that give banks the incentive to grow to dangerous size. Sam Zamarippa, who heads the new group Stop Too Big to Fail, shares his thoughts on the subject at the Daily Caller. Quote:
A few of Stop Too Big to Fail’s recommendations include limiting the leverage of financial institutions, so that small losses do not reverberate through the entire economy; breaking up too big to fail institutions that pose an immediate and systemic threat to our economy; creating tangible incentives against becoming too big to fail, such as raising capital thresholds on institutions’ deposit levels to a point of self-regulation; and taking steps to ensure that big banks can’t just pass the costs of reform onto small investors. For instance, transaction taxes on financial institutions to recover what was borrowed from the Trouble Asset Relief Program (TARP) should not penalize small investors. The goal of our recommendations is to take a sensible approach to our current financial woes, engaging in real reform that has a real impact on the lives of small investors, tax payers, and consumers. More and bigger bailouts for TBTF institutions are not the answer.
The opportunity exists for a left-right coalition to break the mega-banks and separate investment banking from commercial banking. John McCain and Maria Cantwell have taken the first step. The next is for conservatives to seek out other center-left populists in the Congress on this and similar legislation. It would be nice if the president helped, too.