Bust Up the Banks

By Roubini, Nouriel; Mihm, Stephen | Newsweek, May 17, 2010 | Go to article overview

Bust Up the Banks


Roubini, Nouriel, Mihm, Stephen, Newsweek


Byline: Nouriel Roubini and Stephen Mihm

The president's half-measures won't fix our failed financial system. Here's what will.

In early January, Ben Bernanke defended the Fed's handling of the recent financial crisis. The lesson he drew was simple: better regulation could have prevented it.

This is correct. Regulation could be better and smarter. Regulators could eliminate banks' intentional evasion of regulatory oversight. They could solve the too-many-cooks-in-the-kitchen problem, in which an overabundance of regulators and a lack of coordination frustrate effective supervision of the system.

But sometimes it's not enough to impose new regulations on the status quo; sometimes a bit of regulatory "creative destruction" is in order. Many of President Obama's reform proposals are good, but they don't go far enough. There are more drastic changes that can and should be imposed in the coming years, including breaking up big banks and imposing new firewalls in the financial system. There is an even more radical idea: use monetary policy to prevent speculative bubbles.

What follows is a glimpse of the possible future of finance--if policymakers and politicians recognize that confronting crises requires radical reform.

Smaller Is Better

There's a very simple way to curtail the power of the big firms that helped cause the crisis: break them up. The recent crisis highlighted the "too big to fail" problem. The collapse of Lehman Brothers and the resulting cardiac arrest of the global financial system revealed that many institutions had become so large, leveraged, and interconnected that their collapse could have systemic and catastrophic effects.

The ranks of the TBTF club contain few traditional banks. Most belong to another species: big broker dealers like Morgan Stanley and Goldman Sachs; AIG and other insurance companies; government-sponsored enterprises like Fannie Mae and Freddie Mac; and hedge funds like Long-Term Capital Management. While the crisis left fewer such firms intact, those remaining are often larger, thanks to the consolidation that followed the panic.

Not only are such firms too big to fail, they're too big to exist, and too complex to be managed properly. They should be pushed to break themselves up. One way of doing this would be to impose higher "capital-adequacy ratios," which is a fancy way of saying that these institutions should be forced to hold enough capital relative to all the risks posed by their different units. This requirement would reduce leverage and, by extension, profits. The message: bigger isn't better.

For their part, the TBTF firms consider themselves essential to the world economy. Thanks to their scale, we're told, they offer "synergies" and "efficiencies" and other benefits. The global economy can't function without them, they say.

This is preposterous. For starters, the financial-supermarket model has been a failure. Institutions like Citigroup became gargantuan monsters under the leadership of empire builders like Sanford Weill. No CEO, no matter how adept, can manage a global institution that provides thousands of kinds of financial services. The complexity of these firms, never mind the exotic financial instruments they handle, makes it mission impossible for CEOs--much less shareholders or boards of directors--to keep tabs on every trader.

Even nominally "healthy" firms like Goldman Sachs pose a threat. Not that you would know it listening to the firm's CEO, Lloyd Blankfein, who in early 2010 defended handing out record bonuses by claiming, "We're very important. We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. We have a social purpose."

Spare us. Like other broker dealers, Goldman Sachs has a long history of reckless bets and obscene leverage. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Bust Up the Banks
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.