If you live long enough, you get to see lots of things you thought you would never see. Conservative writers supporting breaking up the banks is one of those things. From Goerge Will.
In a sense, TBTF began under Ronald Reagan with the 1984 rescue of Continental Illinois, then the seventh-largest bank. In 2011, the four biggest U.S. banks (JPMorgan Chase, Bank of America, Citigroup and Wells Fargo) had 40 percent of all federally insured deposits. Today, the 5,500 community banks have 12 percent of the banking industry’s assets. The 12 banks with $250 billion to $2.3 trillion in assets total 69 percent. The 20 largest banks’ assets total 84.5 percent of the nation’s gross domestic product.
Such banks have become bigger, relative to the economy, since the financial crisis began, and they are not the only economic entities to do so. Last year, the Economist reported that in the past 15 years the combined assets of the 50 largest U.S. companies had risen from around 70 percent of GDP to around 130 percent. And banks are not the only entities designated TBTF because they are “systemically important.” General Motors supposedly required a bailout because a chain of parts suppliers might have failed with it…..
By breaking up the biggest banks, conservatives will not be putting asunder what the free market has joined together. Government nurtured these behemoths by weaving an improvident safety net and by practicing crony capitalism. Dismantling them would be a blow against government that has become too big not to fail. Aux barricades!
Will is now supporting the bill passed unanimously in the Senate that will direct the GAO to look at whether or not TBTF banks have an economic advantage in terms of their borrowing costs due to their implicit guarantees from the government. As those who read across the spectrum know, their exists a body of literature which suggests that economies of scale are nonexistent once they reach a certain size, probably somewhere between $100 billion and $500 billion. (There are also some studies suggesting otherwise.) This literature has been discussed for years by economists like Simon Johnson and others on the left. Now, we have conservatives like Vitter and DeMint supporting the idea of breaking up the big banks.
How this happened I am not quite sure. I suspect that part of this change of heart comes because they have found a way to blame government for these banks being too big. To be fair, that is partially true. Banks have gotten bigger since the economic crisis as healthier banks were coerced, sometimes, into absorbing some of the weaker banks. Yet, even before the crisis those banks were too large, leading to the perception that they needed to be saved to stop the banking system from collapsing. Remember the record TED spreads at the time. Going forward, there were many calls from the left to break up the banks, and the right defended their size. Now that it can be blamed upon government, it appears to be ok to break them up. You know what? I’ll take it. It is the right thing to do. Whatever really lead to this change of mind, I can only speculate, we should hope that this can lead to the kind of reform we should have had when Dodd-Frank was passed. Break up the big banks. While not a perfect solution, it is one that takes away many of the incentives that existed to cause our subprime crisis. It provides the kind of bright line rule that will be less susceptible to regulatory capture. Let’s just hope that this is more than some passing fancy.