MIT Professor Simon Johnson, author of 13 Bankers, a book Sen. Christopher Dodd says he is reading, has been pounding hard on financial regulation. The 13 bankers in question were given guarantees so that they could go out and become even bigger and, Johnson said, "more dangerous." Some excerpts from an interview with WSJ.com:
These same banks that managed their way into a colossal calamity in 2008 were rescued in 2009. Now we find they're bigger that they were before. They have just as much clout in Washington. Even the Treasury Department, which previously was their very good friend, is complaining about the lobbying – $1.4 million a day spent lobbying against financial reforms proposed by this administration. I think it’s out of control. ...
I think, right now, given where the legislation is in the Senate ... you see a lot of the blocking and tackling of the lobbyists who are people who used to work, you know, in the government, for the Treasury, for this Treasury even who are leading the charge against these reforms.
More broadly, it is an ideology, a set of beliefs that finance is good, unregulated finance is better and completely unfettered massive global financial firms are best. ...
You look at the assets of the biggest six banks [i the U.S.]...relative to GPD. How big are these banks compare to the economy? They are bigger now ; they are 63% taken together. They were about 57%, 58% before the crisis. Go back 15 years the same guys were 17% of the economy. They’re just gonna keep getting bigger. They have a big subsidy. They have a big funding advantage because they are perceived too-big-to-fail. They're just gonna get bigger and bigger until we have another crisis. ...
Like Paul Volcker, but more strongly, Johnson wants the big banks broken into smaller pieces. If they are small enough they can allowed to fail and not take the rest of us with them. That, he says, is because they'll be controlled by market forces in ways that the too-big-to-fail institutions are not since they know the government must step in to rescue them if they get too reckless and greedy and screw up yet again.
Paul Krugman disagrees. What matters, he says, is not how big the banks get but that what they do is regulated.
Here’s how I see it. 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. In fact, that’s precisely what happened in the 1930s, when most of the banks that collapsed were relatively small — small enough that the Federal Reserve believed that it was O.K. to let them fail. As it turned out, the Fed was dead wrong: the wave of small-bank failures was a catastrophe for the wider economy.
Neither Johnson nor Krugman may see their chosen model come to fruition, however, given that the Party of No Way, No How is bent on blocking anything approaching effective regulation and oversight. Meanwhile, the lobbyists make their case, spending their millions to keep their billions. Not arguing against a radical change that would, for instance, spur the founding of more state-owned banks like North Dakota's. Just trying to lower the temperature on the already lukewarm reforms that Congress has drafted.