by Mario Rizzo
I am deeply impressed by Henry Kaufman’s opinion piece in today’s Wall Street Journal. I think he makes a very good case for breaking up financial institutions deemed too-big-to-fail as opposed to the regulatory alternatives being contemplated. As much as it pains me to think about the government regulating the size of any firm, this may be an option that is far, far better than the politically feasible alternatives. You can imagine the horrors that are out there being proposed.
Many of my readers will disagree but I am very willing to be persuaded otherwise.
Tags: Henry Kaufman
November 11, 2009 at 1:44 pm
If the choice really is between a socialized banking sector and smaller firms, I think the libertarian answer is pretty clear – smaller firms. How damaging the breakup is an empirical question that depends on how much the returns to scale are internal to firms. It’s pretty clear that concentration financial services is efficient based on the concentration in New York, London, Dubai, etc. There may even be additional political benefits because no one firm will be able to influence politicians as much as the old ones were able to. Populist anger will likely be appeased and perhaps attention will move to other areas. In time, if big firms are efficient, they’ll grow back. Socialism however won’t heal.
November 11, 2009 at 2:38 pm
I,too,am deeply impressed with Kaufman’s piece. He hit the nail on the head both about the Fed and too-big-to-fail. The size and complexity of the major financial firms do not reflect market forces, but public policies. Those waxing eloquent about the joys of the financial supermarkets need to consider the costs these financial monstrocities impose on the economy and polity. Gary Becker and others have suggested progressive capital requirements with respect to size as an alternative to using antitust.
November 11, 2009 at 3:32 pm
It seems to me that the problem isn’t that they are too big to fail, but interference by the decision makers in government. This perverse incentive alone seems to provide the willingness to take huge amounts of risk. You take away the ability to prop up a disfunctional organization it will no longer act in such a manner. Making businesses smaller does not take away the ability of the government to interfere, but merely adds another layer of meddling and political shenanigans.
November 11, 2009 at 4:15 pm
I think I would prefer the smaller firms poison if I had to pick. On the other hand, could the fear of regime uncertainty foist itself on investors? Think about it, will this help bring about an environment where there will be less investment over the idea of too-big-to-exist? We all know how Washington is, they can switch from too-big-to-fail to too-big-to-exist? I smell a lot more antitrust cases in the future if something like this is implemented. That’s just my pessimism, what do you guys think?
November 11, 2009 at 4:48 pm
Excessive risk is the key issue, but is inextricably tied up with size. These firms do not grow to size for economic reasons. And the government doesn’t then “interfere” because of their size. The banks grow large to get the government protection afforded large firms. With government protection, excessive risk taking is then possible. I agree that antitrust is a hamfisted way of approaching the problem.
November 11, 2009 at 6:43 pm
I hope you weren’t impressed by his ending:
Our financial system is at a crossroads. We can either succumb to the forces that are shifting markets toward greater government back-stopping and socialization. Or we can create a structure in which no institution is too big to fail, and a financial system that is supervised effectively by a modernized central bank.
–
By all means, let’s have a system in which no institution is too big to fail.
But that implies free banking and a gold standard, not “a modernized central bank”
with “effective supervision,” whatever that is.
I’d like to see an op-ed in the WSJ whooping up the abolition of the Fed.
November 11, 2009 at 7:17 pm
Bill,
Of course, my motive in having size limits is to avoid regulation. Let the threat of failure regulate.
November 11, 2009 at 7:40 pm
Bill Stepp,
In my experience, the editors at the WSJ are always looking for well-written, timely and provocative op-eds. Whoop it up.
November 11, 2009 at 11:38 pm
Mario,
that reminds me of the discussion we had. I agree, it would have been better to do that and not need intervention in the future – even though it seems kind of ORDO
November 12, 2009 at 8:51 am
Ordoliberalismus does not exist in the United States. It is a foreign idea.
Are you related to Walter Eucken?
November 12, 2009 at 12:21 pm
“If the choice really is between a socialized banking sector and smaller firms…”
It probably is.
“It’s pretty clear that concentration financial services is efficient based on the concentration in New York, London, Dubai, etc.”
Well, very big firms are very efficient at lobbying government for very big favors!
November 12, 2009 at 1:44 pm
“Ordoliberalismus does not exist in the United States. It is a foreign idea.
Are you related to Walter Eucken?”
Hahaha..
November 18, 2009 at 9:47 am
[...] surprising new Small-Is-Beautiful movement is afoot. Mario Rizzo, Jerry O’Driscoll, Harry Kaufman and others make a case for breaking up too-big-… As Mr. Kaufman puts it, otherwise those companies will become financial public utilities [...]
November 18, 2009 at 10:26 am
[...] new Small-Is-Beautiful movement is afoot. Mario Rizzo, Jerry O’Driscoll, Harry Kaufman and others make a case for breaking up too-big-to-fail financial institutions. As Mr. Kaufman puts it, otherwise those [...]