Is breaking up big banks key to financial stability? Paul Krugman says no.

[DanTex]

Bernie is insisting that breaking up the big banks is necessary, and of course his army of sycophants is now saying that anyone with a different view must be owned by Wall Street. Which means that Paul Krugman is about to go under the bus along with the big chunk of the Democratic party that doesn't happen to be quite as far left as Bernie.

After all, what could the guy who has been right about everything economically since before the financial crisis possibly know about economics.

Anyway, I have a quite different problem with the idea that breaking up big banks is the key to reform: I don’t think it would work.

My basic view is that banking, left to its own devices, inherently poses risks of destabilizing runs; I’m a Diamond-Dybvig guy. To contain banking crises, the government ends up stepping in to protect bank creditors. This in turn means that you have to regulate banks in normal times, both to reduce the need for rescues and to limit the moral hazard posed by the rescues when they happen.

And here’s the key point: it’s not at all clear that the size of individual banks makes much difference to this argument. It’s true that the big losses in mortgage-backed securities seem to have been concentrated at the big financial institutions. But the losses on commercial real estate, which look likely to be even worse per dollar lent, have been largely among smaller banks.

Remember, the great bank runs of the early 1930s began with a run on the Bank of the United States, which was only the 28th largest bank in the country at the time.

The point is that breaking up the big players is neither necessary nor sufficient to protect us against financial crises. That’s why my focus is on reducing leverage.

http://krugman.blogs.nytimes.com/2010/01/11/too-big-to-fail-fail-2/

[virtualobserver]

1. I think that he is wrong in that

Their size allows them to influence legislation, which prevents necessary change...

but right in that the breakup alone is not sufficient.

[zipplewrath]

2. Necessary, but not sufficient.

I would disagree that it is not necessary, but I would agree that it is a long way from sufficient. Furthermore, HOW one "breaks them up" is the most critical aspect.

But as long as there are banks so big that the failure of a single one will bring down the financial system, we have a problem. What Krugman is suggesting is that even without banks that large, systemic failures within the system can bring it down by failing several smaller banks (or other institutions).

Bill Clinton made the point that the reason he was agreeable to the elimination of Glass-Stegal was because there were institutions that were technically "not banks" that were none the less participating in fiscal sectors that had the potential for the same kinds of problems that we ultimately saw. Breaking up big banks won't accomplish enough if we also don't identify/recognize that there are companies out there "doing banking" that appear to be other kinds of institutions.

[Sancho]

3. I've posted this before - what good would a break up do???

Breaking up US banks would do nothing. Closing tax loopholes might help. Most big banks are not in the US, and most influential money is not in the US. The US can't "break up" international banks, and without Congress cannot change the possibility of "influence".

https://en.wikipedia.org/wiki/List_of_largest_banks

1 China Industrial & Commercial Bank of China (ICBC)
2 China China Construction Bank Corporation
3 United Kingdom HSBC Holdings
4 China Agricultural Bank of China
5 United States JPMorgan Chase & Co.
6 France BNP Paribas
7 China Bank of China
8 Japan Mitsubishi UFJ Financial Group
9 France Crédit Agricole Group
10 United Kingdom Barclays PLC
11 United States Bank of America
12 Germany Deutsche Bank
13 United States Citigroup Inc
14 Japan Japan Post Bank
15 United States Wells Fargo
16 Japan Mizuho Financial Group
17 United Kingdom Royal Bank of Scotland Group
18 China China Development Bank
19 France Société Générale
20 Spain Banco Santander

http://www.huffingtonpost.com/2013/04/29/wealthy-stashing-offshore_n_3179139.html

Global Super-Rich Stashing Up To $32 Trillion Offshore, Masking True Scale Of Inequality: Study

The global super-rich are stashing trillions of dollars offshore with the help of some of the world's biggest banks, putting billions of dollars out of the taxman’s reach and masking wealth inequality's true heights.

Wealthy people were hiding between $21 and $32 trillion in offshore jurisdictions around the world as of 2012, according to a 2012 study from the Tax Justice Network, an organization which aims to promote tax transparency. The study, highlighted by a recent Bloomberg News report, found that more than $12 trillion of that money was managed by 50 international banks, many of which received bailouts during the financial crisis, according to James Henry, the study’s author.

“There’s a lot more missing wealth in the world than we had known about from previous estimates,” Henry told The Huffington Post. “The real scandal is not all these individual scandals but the fact that world’s policy makers who know about this stuff, have basically done nothing.”

[hedgehog]

4. "army of sycophants" - as soon as I read that, I skip reading the rest.

We can support our candidates without worshiping them. The same goes for any similar descriptions of Hillary supporters.












Besides, I don't know what all the fuss is about; it's going to be Martin O'Malley.

[Luminous Animal]

5. He did say in April of 2010, that he would like the big banks broken up for political reasons

http://krugman.blogs.nytimes.com/2010/04/18/six-doctrines-in-search-of-a-policy-regime/?_r=0

Personally, I'm with Stilglitz on this matter and have been for a long time.

http://www.washingtonsblog.com/2012/07/11869.html