There's No Downside to Breaking Up Banks
"Too big to fail" banks provide little benefit and cause huge problems
July 18, 2013
In the last few years, plans for breaking up the big banks have gained support from both ends of the political spectrum. Unfortunately, the more centrist figures in both political parties continually stand in the way. This is a clear case where the ability of banks to buy politicians is obstructing the will of the American people.
The basic point is straightforward. The large banks enjoy a massive taxpayer subsidy in the form of implicit insurance. Creditors believe that the government will bail them out if the banks get themselves in trouble, as was the case in the financial crisis. Because of this government guarantee, investors are willing to lend money to J.P. Morgan and Goldman Sachs at lower interest rates than they would demand from a smaller bank.
Bloomberg News estimated the size of this subsidy as $83 billion a year. To put this in perspective, the whole food stamp program costs $76 billion. That means taxpayers give more money to the big Wall Street banks each year than to the tens of millions of people getting food stamps. Other estimates of the size of the subsidy are somewhat lower, but there is little doubt that we are giving large amounts of money each year to some of the richest people in the country.
In addition to the subsidy, having too big to fail banks can also contribute to the sort of instability we saw in the financial crisis. After all, if the government is backing everything up then investors have little reason to be concerned about risk.
It’s also not clear what the downside is of breaking up the big banks. The mega-banks that dominate finance are actually a relatively new creation. The merger wave of the last quarter century has resulted in banks that are more than five times as large relative to the size of the economy as the biggest banks were in the 1980s. In what ways are the mega-banks of today serving us better than did the banks of the 1980s?
Finally, we get the argument about losing out to foreign competition. Who cares? We buy clothes that were made in Bangladesh, cars that were made in Japan; is there some problem if we get our mortgages or credit cards from a German or Swiss bank? If these countries fail to properly regulate their banks, then it is their taxpayers on the line.
In short, there are no arguments on this one, just the money of the financial industry. The left and right acting together can overcome their money.