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The Non Debate Between Krugman and Johnson

So, the latest kerfuffle is between Krugman and Simon Johnson. Johnson wants the banks broken up as a way of making a new crisis better (or at least getting rid of “too big to fail”), Krugman notes that in the Great Depression, with lots of banks, there was still a crisis.

The answer is that too big to fail banks are a huge problem, because they massively increase moral hazard, concentrate market power too highly, and concentrate political power too much.  They have to go.  Johnson is right.  I should add that keeping control of the size of banks was part of what Glass-Steagall, the bill created in the Great Depression to stop another bank collapse from hapening, did.  The folks who created it knew what they were doing.

However Krugman is right in the sense that just reducing the size of banks isn’t enough by itself, it has to be coupled with all sorts of other changes and a regulatory apparatus which will actually enforce those rules.

Reduce the size of the banks.  It has to be done. The fact that it is not sufficient in and of itself does not mean it isn’t a necessary step.


Radio Interview with Ian Welsh by Ken Rose


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  1. Reducing the size of individual banks won’t reduce their collective political power because resulting smaller banks will simply form a collective industry lobby group.

    The entire financial sector needs to be reduced in size and revenues. FIRE is a threat as long as it has price setting power over the entire economy and essentially unlimited resources to buy government policy.

    No regulations can survive contact with another non-governing administration. As long as the US political process continues to install administrations that don’t believe government can work and set out to prove it, regulation is pointless and the situation is hopeless.

    Which is to say, the situation is hopeless. Period.

  2. Ian Welsh

    I’m not so sure about industry groups being as effective at lobbying, though I do agree that reducing their share of profits is absolutely necessary.

  3. If I had to choose between the two approaches, I’d choose Krugman’s. Still, in the grand tradition of American greed, I want both, and don’t see why I can’t have it all.

  4. Ian Welsh

    KISS. the best approach is hard rules – size not above X, no propietary trading, leveage limit is Y, nothing off the books, must keep all loans on books, etc… No exceptions.

  5. Russ Wellen

    With dwindling resources dooming the idea of an economy based on growth, does anyone actually think that capitalism will still exist in 100 years? It will no longer be tenable. (As if it is now.)

  6. In tech terms “too big to fail” is a “single point of failure” threat.

    A single point of failure (SPOF) is a part of a system which, if it fails, will stop the entire system from working.

  7. Ian Welsh

    Capitalism will still exist, yes, how dominant it will be is the question…

  8. cenobite

    I think people have forgotten how regulated banking used to be.

    My dad was a banker 40 years ago, back when it was boring. Back then, interstate banking was not allowed. That is, Bank of America was a California bank that could only operate in California (and internationally). That is a hard and fast rule that is easy to enforce and limits the size of banks. Another was that bank holding companies were illegal — they were considered fraud factories.

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