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March 21, 2013 3:37 PM Break Up the Big Banks (And De-Regulate Them!)

By Ed Kilgore

As a follow-on to Haley Sweetland Edwards’ post yesterday on the hard slog to implement Dodd-Frank (and her fine article on the broader subject of regulatory implementation in the latest issue of the Monthly), what are we to make of the rising talk on the Right of an agenda that includes “breaking up the big banks?”

At TAP, David Dayen has a big and relatively upbeat piece on this subject, noting the odd-couple cooperation of Sherrod Brown and David Vitter in the Senate on legislation to cap bank size. He observes, however, that the two sides come to this issue with vastly different assumptions:

The Tea Party’s critique and the conservative academic diagnosis serve as a kind of a funhouse-mirror version of the way liberals talk about these issues. Rather than assailing corporate malfeasance, conservatives talk about government overreach. Fundamentally, what drives opposition to banks on the right is the sense that government has rigged the game to “pick winners and losers” by delivering giant subsidies to the nation’s biggest banks and, after they get so big their collapse threatens the entire financial system, bailing them out when they run into trouble. “I’ve talked about this issue in more town hall meetings than maybe any Republican. There’s been a serious erosion of trust in our institutions of power,” former Utah Governor and presidential candidate Jon Huntsman said at a panel discussion in Washington earlier this month, “and that’s directly tied to this whole subsidy issue.” The theory is simple: If investors believe a mega-bank will get bailed out if it gets into trouble, without any losses forced on creditors, they have more confidence in lending to them than their smaller rivals, giving them a competitive advantage and incentivizing them to grow large.

So it’s important to ask what those cooperating across party and ideological lines to fight “Too Big To Fail” banks think about the broader regulatory landscape. That’s where the trouble begins, as Matt Yglesias suggests in his take on Dayen’s piece:

Is there really a bipartisan movement here? I’m not so sure. I’m not saying there isn’t. But I have my doubts. To me a key question is do people want to reduce bank size as part of a regulatory strategy or as an alternative to a regulatory strategy. Those are two very different policies. My view is that the right direction of causation is that better-regulated banks would be smaller and much less likely to fail, but that’s not the same as saying there’s a class of “Too Big To Fail” banks that can be shrunk down and forgotten.

So in cooperating with conservatives on bank-size restrictions, it’s pretty important for progressives to insist on linking such measures wherever possible with robust regulation of the financial industry. Indeed, that could be the real ball game.

Ed Kilgore is a contributing writer to the Washington Monthly. He is managing editor for The Democratic Strategist and a senior fellow at the Progressive Policy Institute. Find him on Twitter: @ed_kilgore.

Comments

  • iyoumeweus on March 21, 2013 5:45 PM:

    Break up the banks and have strong laws rules and regulation and here is why:
    The invisible hand has a thumb on the scale causing free enterprise and markets to favor the most powerful within any society.
    Only government can remove the thumb by using laws, rules and regulations and the strong, sure, even and fair enforcement thereof.

  • paul on March 21, 2013 10:14 PM:

    So what you're saying is that the republicans want a replay of the S&L crisis (lots of little corrupt institutions) rather than of 2008 (a few huge corrupt institutions)?

  • Epicurus on March 22, 2013 12:25 PM:

    Progressives act on evidence, science and facts. Republicans act on myth, belief and what Rush tells them. Which group should YOU trust? "The Invisible Hand of the Market" gave us all the finger in 2008; what makes these morons think it won't happen again unless we regulate the bankers? Always remember the definition of insanity; repeating the same actions and expecting a completely different result.