Guest Post: Top Economists Say We Must Break Up the Insolvent Banks (Government Says Let’s Make Them Bigger)

By George Washington of Washington’s Blog.

The following top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion:

  • Dean and professor of finance and economics at Columbia Business School, and chairman of the Council of Economic Advisers under President George W. Bush, R. Glenn Hubbard
  • MIT economics professor and former IMF chief economist, Simon Johnson
  • The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
  • Economics professor and senior regulator during the S & L crisis, William K. Black
  • Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales

Others, like Nobel prize-winning economist Paul Krugman, think that the giant insolvent banks may need to be temporarily nationalized.

In addition, many top economists and financial experts, including Bank of Israel Governor Stanley Fischer – who was Ben Bernanke’s thesis adviser at MIT – say that – at the very least – the size of the financial giants should be limited.

And yet, the top economic policy makers (Summer, Geithner and Bernanke) are doing just the opposite – allowing the giant banks to get even bigger. The Washington Post put it succinctly with a story entitled “Banks ‘Too Big to Fail’ Have Grown Even Bigger”.

As Bloomberg points out:

The Obama plan would label Bank of America, New York-based Citigroup and others as “systemically important.” It would subject them to capital and liquidity requirements and stricter oversight, relying on the same regulators who didn’t understand the consequences of a Lehman failure. And while companies could be dismantled if they got into trouble, they, their creditors and shareholders could also be bailed out with taxpayer money, according to the plan.

The chief architects, Geithner, 48, and National Economic Council Director Lawrence H. Summers, 54, say they don’t think it would be practical to outlaw banks of a certain size or limit trading activities by deposit-taking banks, according to people familiar with their thinking. They said the two men, who declined to be interviewed, and others on Obama’s team believe the lines are too fuzzy between banking and investing products and that forcing the divestiture of units and assets would create bedlam.

“It’s a very difficult thing to say as a national policy goal that we’re going to limit the success of an American firm,” said Tony Fratto, 43, a spokesman for President George W. Bush and former Treasury Secretary Henry M. Paulson who now heads a Washington consulting firm.

In other words, the people guiding America’s economic policy don’t want to break up the insolvent giants or even keep them from growing, don’t want to reinstate Glass-Steagall, and want to let the banks keep using their same inaccurate models, overseen by the same spineless regulators.

The President of the Independent Community Bankers of America put it succinctly when he said:

“Does anyone think it’s a coincidence that less than 10 years after they repealed Glass-Steagall, the financial markets collapsed?” … He called current rules for banking a recipe for a “Molotov cocktail.”

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  1. jest

    Well put. Unfortunately the administration is on the dole from the “masters of the universe.”

    I guess they got what they paid for.

  2. ndk

    I’ve totally given up on this.

    It’s eminently clear to me that we’ve moved towards a model where the government teams up with national champions in hopes that, by their powers combined, both will be more competitive internationally.

    Whether Google, Halliburton, defense contractors, GE, GS/JPM, GM, AIG, Facebook, or Citi, the Federal Government is a true Chimera that is half corporate and half public sector.

    This is the new face of America. So, you can learn from it, or move to Ouray, as I still sometimes wish I had. Grow, merge, and lobby, or wither on the vine.

    1. ndk

      Yes, I’m keenly aware of the existence of our Mussolini-style fascism by now.

      In my professional life(with an academic consortium), I struggled with great futility against the mutual embrace of Google, Yahoo, Facebook, and others and the Feds once Obama showed up. Now it’s over, and they won.

      It was a small peek into how community and small bankers must feel as they, the prudent ones, fall in great numbers to the FDIC as the big guys with the right ears whisper their way not just out of immediate peril, but into a vastly stronger position than they had before they detonated.

      I guess I just don’t see the point in fighting anymore. I greatly admire they who do.

      1. Toby

        Hi ndk,

        do you really think the model you so eloquently describe is sustainable? Can it last? Is it self-replenishing? I don’t think so. You are still entitled to hope, in my opinion.

        Meanwhile, as the beasts in the woods accumulate all wealth to and for themselves, they are strangling its source, bleeding it dry, committing, unwittingly, a slow and avaricious suicide. It’s ugly to watch, but can’t last. There is more to humanity than greed and selfishness.


        1. DownSouth


          There was an entire industry that grew up over the past few decades whose sole purpose was to recast greed and selfishness as being virtuous, or at least the only human impulse extant. Perhaps its most avid and cutting-edge participants were the New Atheists (Ayn Rand, The Four Horsemen–Richard Dawkins, Daniel Dennett, Christopher Hitchens, Sam Harris–etc.), but it certainly had its less fanatical proponents in academe (especially economics departments) as well as the numerous right-wing think tanks like the American Enterprise Institute, the Heritage Foundation and many others.

          Its main strategy has been to juxtapose its own fundamentalist beliefs against those of religious fundamentalism, so we have this Chiliastic battle where error is pitted against error, half-truth against half-truth. This worked very well as long as the dark clouds of right-wing Christianity and Islamic fundamentalism were gathering, or at least could be construed as gathering, and before its own internal flaws became so manifest.

          There seems to be a revolt against the commissars of greed and selfishness now gaining steam on American campuses, as evidenced by this lecture by David Sloan Wilson:

          I suppose there are still a small handful of honest persons left in American acadame, stiff-necked enough to have withstood the onslaught of the Mandarins of capitalism and militarism.

          1. Dave Raithel

            1. Your sweep from Rand to Harris nearly flummoxes me. They may all be sinners, but their sins are not all alike and not all of greed and selfishness.

            2. There is nothing in the recognition of “between group” selection and “within-group” selection that assures autonomy. It can, and will be developed in some ways that will recall “social Darwinism” in the “my tribe can beat up your tribe, and make better art, music, literature, and technology at the same time” sense.

            3. I do very much enjoy reading your posts – they awaken associations mostly long set aside. The ScienceNetwork talks are clear and concise. But this is my honest impression – and perhaps you and the participants would concur – these are emendations on the basic issues and questions posed by the greatest minds of the 19th Century, Darwin, Freud, Marx. (William Gass once said in a lecture (I have to paraphrase): Darwin proved that we are not at home in nature, Marx proved we are not at home in our community, and Freud that we not at home even within ourselves.)) Still trying to get settled in.

            4. I don’t know how any framework for organizing one’s experiences – call it metaphysics, theology, cosmology, ontology, scientism – the core commitments one brings to reality while being in it – cannot be labeled “stealth religion.” Even if one abandons that core (has an emotional and paradigmatic crisis, so to speak), one only changes to another framework (or adopts nihilism …. which, I’d argue, still lets some people get through their day.) Perhaps that is intended by the speakers closing remarks that what he (and his associates seek) is the purposeful practicality of religion without the nonsense of detachment from reality.

          2. DownSouth


            Sam Harris is without a doubt the least strident of this group, but it seems it was of his own volition that he elected to place himself within the group:


            I also find it interesting that the more moderate Sam Harris was the only member of the group to appear in the latest(2008) Science Network “Beyond Belief” lecture series. He was joined by Dennett in the 2007 series and Dawkins in the 2006 series. And if one takes the time to watch all three series in their entirety, it’s rather clear that the religion bashing has been progressively toned down. Could this be by design of the planner? (The amount of anti-religious bigotry in the 2006 series was disgraceful, and I know from personal correspondence with some of the presenters that I was not the only one left reeling by it.)

            Wilson’s attack on many recent endeavors in the field of economics is not just that they are failures as science, but that they are dogma masquerading as science. Thus its practitioners are guilty of the additional crime of hypocrisy. “The kind of individualism that dominated economics for decades has been profoundly misleading however scientific in appearance,” he asserts. Religion makes no pretense to be science; therefore it is not a “stealth religion.” My personal belief is that economics has been able to cash in on the phenomenal achievements of the natural sciences, taking credit where none is due, because the discipline has had an extremely effective lobby. The reason this advocacy has been so successful is because the economics profession has allied itself with and works hand in glove with economic power and political power.

            After the awesome destructive forces unleashed by science were turned against mankind beginning in the first part of the 20th century, and the advent of the Nazi doctrine that was largely based on science, many philosophers began to question the truthfulness of scientific objectivism; I suppose Whitehead and Wittgenstein being the most prominent. Personally, when I’m in my most pensive of moods I’m not sure that I even believe there is such a thing as truth. What there is, however, is the concept of “power arrests power,” formulated by Montesquieu, bequeathed to our Founding Fathers, embodied in our constitution in the system of checks and balances, and verbalized in this statement by John Adams: “Power must be opposed to power, force to force, strength to strength, interest to interest, as well as reason to reason, eloquence to eloquence, and passion to passion.”

          3. Skippy

            @DownSouth and Dave Rahel,

            Not unlike the advent of the Printing Press the Internet has spurred the great debate to new heights especially with regards to speed, volatility and mass of thought.

            This reminds me of an old Church in my youth that with in a span of 10 years split down the middle (maybe 7 times) to start new ones under the premise of religious interpretations, when in fact it was more like personality cults, power struggles with in the population. Know wonder in middle America you can chuck a rock in any direction and hit a church steeple.

            So whilst the great debate rages on in Academia and other electron stew pots the offspring of the American League consolidate, gain mass and impose greater influence over a disenchanted population. The human prediction machine (aka the brain) of the general population is looking for secure, comforting, paternal, emotionally supportive reinforcement by anyone offering it (no matter the cost).

            Once again a population will brew and well intentioned minds will pontificate missing an opportunity to a more aggressive voice of better days after a price has been payed.

            Just look at the freedom works foundation today…shez.

            This is a fight, tooth and claw affair, not some conversation after good food and drink evening at friends.

            Skippy….conversation with an old friend…man the Grateful Dead made me the person I’m today, free from greed and over consumption. Skippy replys…bro their the biggest grossing live band in all of modern history, no wonder they gave free acid out to the first row in the old days, brilliant marketing ploy…It was like watching a blower go up on a top fuel car.

          4. DaveRaithel

            Mr. DownSouth

            I am not sure this will be nested in the correct place; nor that you will see it (because I only accidentally caught your reply to me), but I did follow your link, and listened up until Mr. Hitchens started on about the stoning…at which moment I said to myself: I know this conversation already…

            For our purposes, as I read you for having introduced the synthesis that atheism, added to rational atomism, yields militarism, is this:

            The problem the “left” has not solved is: When should I, if ever, commit myself to harming another human being who 1) cannot or will not be reasoned with and 2) who is doing something horrible to another person 3) so that the horror will cease?

            Categorical pacifism has no useful answer to that question. Categorical militarism is correct about as often as a stopped clock – if that.

            The last I read of Harris, he was admittedly ambivalent where his thinking had taken him. Hitchens lost me long ago with his endorsing the War to Destroy Iraq. Still, the QUESTION remains, and again, to get from “altruism is irrational” (a paraphrase, not a quote) to militarism, via atheism, just loses me. Here’s Dennet on W’s stupid war on Iraq:

            “… even a war initiated with just intentions can be betrayed by conduct of war that violates principles of morality. It is this, more than anything else, that utterly disqualifies the fiasco in Iraq as a candidate for just war. Saddam Hussein was an extraordinarily evil dictator, and the world is well rid of him, but the steps taken by the USA to accomplish this – unilateral, arrogant, and shockingly ignorant about local conditions – have brought shame on the nation.” (

            And here is Dawkins BEFORE the stupid war:

            As much as I am very much a “big picture guy” – can’t really be a Marxist, small “m” or “M” whichever without being a big picture guy – I still don’t get what you’re trying me to get about them, because their details get in the way.

      2. mikkel

        ndk I wouldn’t give up so soon. Maybe pull back and let things play out instead of wasting energy, but not give up for all eternity. There were times in this country where the merging of corporate and state power were much worse than they are now — to the point that troops were gunning down workers here and overthrowing foreign regimes for uh…bananas (really?).

        The fact is that the world doesn’t have the financial or natural resources to continue to support our current path, and it’ll all come crashing down sooner or later. Hopefully it’ll be sooner when the problems aren’t as bad and there is a chance at doing it peacefully, because if it takes 10 years or so and the projections about oil/population growth are correct then it’s going to get real bad.

  3. Trainwreck

    The problem is there might be little there “there” to break up. In order to break them up they would have to crack open the books and stare into the vast abyss of just how truly insolvent these banks are.

    Or maybe they are now solvent, and the administration thinks that fewer larger institutions can do a better job of unfreezing the credit markets, then a larger number of smaller institutions.

    I think Krugman is right and at some point they are going to have to be nationalized.

    By the way I was shocked when I found out how many FDIC insured banks we have in the U.S. Over 8300! (Was 8420 at one point)

  4. Skippy

    @George Washington,

    I understand *perfectly* who has won, we have been first *captured* and now *owned* (for generations to come) abetted free range chattel.

    The American noblesse in their Esperanza of Global influence_ideologically and religiously_ made larger and larger bets, too which we the rabble with our blood and bone have enabled.

    This was a worthy crusade in their minds and as such be made hole, miscalculations reduction was obviously dark forces at play, to be fought, to the end of days.

    Skippy…I fear not our reduction of status or wealth, but of our ability to form thought out side the paradigm handed down from above be it anyone of their feeder tubes.

    PS. fascism yes, but to what end do they require that kind of control is my question.

  5. Hugh

    A lot of us non-top non-economists have been calling for TBTF to be broken up for longer than many of those on your list. There are really several things we need to do in this regard:

    1. Return to Glass-Steagall
    2. Cut the government credit lines and backing to Goldman Sachs and Morgan Stanley
    3. Prohibit banks like JPMorgan from holding most derivatives and severely limit those few, like currency swaps, that it can
    4. Severely limit securitization of bank loans
    5. Make bank directors personally liable for the solvency of their institutions.

    The bottomline is that commercial banking should be restricted to vanilla operations. The last point about making directors liable would encourage banks having problems to seek help early on and would also encourage them to lend more locally to customers and communities they knew.

  6. Hugh

    One last thing, who in their right mind would quote Tony Fratto on anything? In an Administration full of idiots, Fratto was a standout moron.

  7. ComparedToWhat?

    I’ll second the recommendation on this week’s hearing by the House Science & Technology Committee. The first panel is good too — Taleb & Bookstaber were both in fine form. Taleb’s prepared testimony includes the list of ten recommendations he published in an FT opinion piece, which is required reading IMHO.

    Bookstaber: A valve in a nuclear power plant isn’t going to try to convince you that it works when it doesn’t. However, gaming the system is central to financial markets.

    Taleb: Talent on Wall Street? They just destroyed $4.3 trillion of wealth worldwide and it’s not as though this is the first big blow-up ever. Certainly the bankers are talented at paying themselves large bonuses but beyond that, what?

    I say we lock Harry Markopolos, Ken Rogoff, Nassim Taleb and Chris Whalen in a room with a dozen random citizens and give them two weeks to sort this.

    Meanwhile each major faction of the Republicrat Party picks one person, who each picks an advisor, and another dozen random citizens are locked up with them for two weeks to devise a tax code that fits on five sheets of paper.

  8. Marc

    I am looking for anna schwartz take on this but the link provided leads me to a Kansas Fed paper by Thomas Hoenig. Could you please provide the right url that details Anna Schwartz thoughts on this.

  9. Marc

    The link provided for Anna Schwartz ins taking me to Thomas hoenig’s opinion piece. Could you please provide the link that details Anna Schwartz’s thoughts on this.

  10. Richard Kline

    ndk: “It’s eminently clear to me that we’ve moved towards a model where the government teams up with national champions in hopes that, by their powers combined, both will be more competitive internationally.” The mis-statement here, to me, is that you see this as a change. Take a look at Anaconda Copper, US Sugar, United Fruit, The Pullman strike, American China policy before 1949, or the history of Federal Government hand-in-gonad concupiscence with land speculators prior to 1900. The US Government has lined up with major money against the world and its own citizenry as a continuous act of policy from its inception, with only occasional swerves from that provoked by severe monopoly and criminality.

    From that perspective, the only way we’ll get reform is via more ‘monopoly cum criminality.’ So let’s get on with it, methinks. Oh, it’ll be harder now than in the 1930s. Then, with a quarter of the country unemployed, and a quarter of the homes in the US foreclosed on, the powers that be were terrified of a Red tide of change, so they gave the working class a little, and the middle class some back-up. Worked pretty well. Now, there is no such fear, and hence no such response. The citizenry wants to be co-opted and to get back ‘to normalcy.’ So said citizenry needs to keep hearing that they’re chumps and punks for an oligarchy who siphons off all profits for itself and stifles all change. In that regard, the health care ‘reform’ flop-fest we are currently watching may be instructive to the middle class: they are watching themselves be robbed in public by the insurance industry and Big Pharma, and while the don’t quite ‘get it’ they’re none too happy. More of the same seems necessary; and regardless more of the same is impending.

    And regarding those who oppose this all, it’s a long-term process. The notion that the country could or would elect a white knight [no jibe intended, take it strictly as a metaphor] who would ‘make it all better’ is, hmm, jejeune, there’s a word. Not that I’m making any accusation at a particular individual. Regarding reform, one has to be in it for the long run. That involves muckraking. It involves organization at something _other_ than the nonsense of raising funds for a lackey of the oligarchy. Don’t give up; don’t blow-up; stay on the low boil and pass the word. Sez I.

    1. Dave Raithel

      If I had the capital (and I don’t) or if I could borrow the capital (and I can’t), I’d be making flags and bumper stickers saying “Don’t Tea-bag On Me”, with that little snake holding the strings of two tea bags dangling from it’s mouth. Why the Dems cannot wage such simple counter-propaganda is beyond me – except, I guess, it just ain’t cool. So if anybody has the where-with-all to do this, all I ask is you mention you got the idea from somebody in the Harpo Marxist Brigade….

    2. K Ackermann

      And the Supremes just might overturn what little campaign finance restrictions there are.

      Keep turning up that heat.

  11. Skippy

    Oh Richard,

    Would you and I be included in the next Hollywood Ten. I’m good with that, but Ive got dibs on Dalton Trumbo persona_OK_except for the wrestling photo part, he’s on the bottom of the dog pile.

    Skippy…Richard, Caribbean sunsets await us at Gitmo or caravaning around Mexico.

    PS. you do drink socially right?

    Wiki link:

    1. Richard Kline

      Yes, I do drink socially; you gotta relax yerself to spite The Man! I’m not a hard liquor man; wine is what I put in my glass. Willakenzie pinot noir and qualitatswein from the middle Rhine, maybe a trippel if the weather’s hot. I’ve got to get famous before anyone would care to haul me before a committee, but the time for that was the past eight years: the neo-McCarthyites lost the 2008 election, and we’ll be seeing less of them, other than the neo-crazies going all whirlygig Goldwater style. Good theater until somebody shoots somebody famous . . . .

      1. Skippy

        Great, I’ve got the better half a case of Penfolds Bin 707 Cabernet Sauvignon, pure velvet and will bring a slab of Little Creatures Pale Ale to aid relaxation before upping the Man.

        Skippy…in moderation of course.

  12. sangellone

    Its one thing to advocate a policy and quite another to get it done. I too hate the TBTF doctrine but I have some concern over how you go about breaking up huge financial conglomerates especially when government officials are engaged in an economic highwire act.

    As Yves notes above in her account of the problems occuring trying to fathom Lehman’s derivatives trades, these mega banks are ultra complex entities, in some respects, almost living organisms. Like a tree, for example, it is much easier to prevent it from becoming so big it endangers the house than to take it down once it is 100 feet high with its
    roots growing into the foundation. Unfortunately we have no Asplundh’s or Davey Tree Service type companies in the financial industry who know how to take down an overgrown bank.

  13. K Ackermann

    Bank of America – America’s Loss Is Our Gain

    Citi – Your Systemically Important Predatory Lender

    Morgan Stanley – You Help Us Help Ourselves

    Goldman Sachs – Shut The Hell Up About The Money, Okay?

  14. ndk

    I appreciate the kind words and encouragement coming from so many wise voices here, but I really wasn’t seeking it. As Richard Kline implied, I’m just accepting a fact and conserving my own time and energy. I have to move on.

    Fascism is certainly not as new in America as we’d like to think it is, but we’ve had a few good Presidents along the way who have broken the symbiosis for periods of time. I’m particularly fond of Jackson and Teddy. Neither the Square Deal nor the failure of the Second Bank of the U.S. required suffering or rebellion; they just needed principled leadership.

    But we don’t have principled leadership today. We have the opposite. Now, in my industry, the ties are forged and there will gradually be an embedded, dependent base. That’s it. It’s bad, and it’s the second time I’ve been a victim of it, the first dealing with defense contractors slurping up obscene percentages of grants they subcontract.

    I do feel worse for the community banks than I do for my own industry. They were shafted horribly. But it’s not going to change. We can’t even get past the healthcare lobby. You want to try the financial one, or the social media that Obama rightfully thinks got him elected?

    Furor after the fact feels good, but the deals get cut and cemented in back rooms long, long before it hits other players, much less the media. And I feel even worse about myself hoping that a crisis will occur to dislodge the current oligarchs, even if it’s somewhat inevitable, as mikkel and others hint.

    And I do think today has more integration of government and corporation than any time in the past. I’ll take your banana wars and raise you a second war in Iraq or Afghanistan, your choice, and we’re using private contractors to boot. The utter inability to achieve financial reform, healthcare reform, tax reform, the Gini coefficient, the second Gilded Age, an inability to cope with Medicare or Social Security issues; where should I stop?

    I have positive ways I can contribute to the world, in ways that are not lucrative enough for government or large business to care about. So I’ll stop there, and do my best to improve America in the process. :D

    Thanks again.

  15. sangellone

    Oh shut up! NDK you, occasionally, make intelligent comments, but the world doesn’t subscribe to formulaic concepts.

    Credit and debt are concrete:real. If there is one thing we can conclude from the present situation it is that debt has overun credit. That is not a sophisticated concept. Only an economist ( or a totalitarian) would try and twist it into an ideology.

    1. ndk

      I appreciate the half-compliment, sangellone, but Washington posited a very real contrast between the government choosing to enlarge insolvent banks and top economists advising breaking them.

      This blog has chronicled the revolving doors between the regulatory agencies and the financial industry, and how many alums from GS in particular end up working in government. The financial industry worked hand-in-glove with Treasury during the crisis. We have huge ownership stakes in some of America’s largest corporations, and they’re taking at least some marching orders from Washington.

      If today’s government were interested in protecting its own power from the largest corporations, wouldn’t it want to break them up quickly? Or does today’s government actually draw power from those corporations, as every campaign donation and the ridiculously large lobbying industry indicate? There is a strong, if controversial, case to make that corporatism is thriving in America today.

      But I’m not sure what any of that has to do with debt overrunning credit, or what that even would mean here, as debt is credit in our current fractional-reserve system.

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