Posted on 12 January, 2010 | 53 Comments
One of the most remarkable things about the financial crisis is that, despite nearly destroying the economy, it hasn’t led to any meaningful banking reforms. One might think that, after a near-death experience, fixing the system would be a top priority. But for a variety of reasons, including the market recovery, nothing has changed.
That’s outrageous, says Simon Johnson, MIT professor and former economist at the IMF. And it means that we’re just heading for a similar crisis again.
The most important and necessary reform, Professor Johnson says, is the elimination of “Too Big To Fail,” an implicit policy in which our government has agreed to bail out any financial institution viewed as large enough to bring the system down.
In Johnson’s view, the way to scrap “Too Big To Fail” is to chop the banks up and then limit their future asset size to a specified (and small) percentage of GDP. Tying bank size to GDP would allow them to grow with the economy, eliminating the need for constant updates to the size cap. It would keep them small enough that they wouldn’t threaten the system.
Goldman Sachs, for example, could be chopped up into, say, five parts. Goldman’s shareholders would still own all five parts, so they wouldn’t suffer, and the five mini-Goldmans would then be free to take as much risk as they wanted without having the taxpayer on the hook.
One of the arguments against this plan is that our banks would have trouble competing in a global market in which Asian and European banks have no such size restrictions
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