Free Market Fundamentalist Opinion

Breaking Up Banks

Simon Johnson, former chief economist with the International Monetary Fund and currently an MIT professor of entrepreneurship, has been arguing for the forced downsizing of Wall Street’s biggest banks for well over a year. In May 2009 he fiercely criticized what he described as the country’s “financial oligarchy” for creating the 2008 crisis and subsequently resisting reform of the market.

At the time, Johnson warned that a true depression was still in the making. Big banks could not be trusted, he wrote, so government had to step in with legislation to ensure that no company would ever grow “too big to fail” again. Johnson has been repeating that same message over and over again, especially in recent months as Congress came to consider financial reform.

Most recently, he contributed an article to the website of The New York Times under the title, “Breaking Up the Banks.” Johnson argues that there are currently six banks deemed “too big to fail” by both credit markets and the government. Their bailing out has only enforced this perception, of course. Since Washington borrowed billions of dollars to keep these businesses afloat, they and their creditors have come to believe that in any event, a government bailout will be made available to them if ever they get into trouble.

Considering the immense political leverage these “megabanks” allegedly possess, according to Johnson, “there is no way to significantly reduce the risks posed by these banks unless they are broken up.”

Unfortunately, the bill currently under consideration with the Senate does not “reduce the size or seriously limit the activities of the megabanks,” yet “a broad cross section of society completely understands that these institutions brought us into the trauma of September 2008” and have only become bigger since.

An economist shouldn’t base his judgement on what “a broad cross section of society” supposedly understands, especially in the case of the 2008 financial meltdown of which the causes are still widely debated and oftentimes misrepresented by lawmakers for their own political gain.

One can very well make the case that banks weren’t primarily responsible for the crisis — a crisis that, after all, started in the housing market which was deeply infested with government intrusions and controls. Considering the simple fact that nearly half of all subprime mortgages were in the hands of government-sponsored entities that wouldn’t have existed in a free market, how can one honestly put the blame exclusively on private banks of which only a handful invested dearly in these unsavory products?

Such facts are conveniently left out of Johnson’s “megabank” narrative. “The electorate now completely understands,” he insists, “that the attitudes and compensation structure of the largest banks lie at the heart of our current macroeconomic difficulties.” But mobs wielding pitchforks don’t make for a very convincing argument.

Consider the moral implications of a government dictating which corporations are “too big” and will therefore be broken up. Ask yourself who will make these decisions. Can a Washington bureaucrat or a Wall Street regulator set such terms in complete sincerity? Is there an objective way to measure the proper size of a bank?

If the answer to that question is “no” or even a “maybe” then Johnson’s plan would produce nothing short of arbitrary government in which financial enterprises are guilty the moment they contemplate expansion. The Obama Administration is already institutionalizing something of a government of whim. The United States needs no more of it.