Break Up the Banks

Gambling is best left to office pools and casinos. Banks shouldn't be playing roulette.

Yet that's what many of the nation's biggest banks did in the run-up to the near collapse of the financial system in September 2008. They invested in exotic assets that even their top managers couldn't explain.

Tough, new regulation, including a breakup of the biggest banks, is needed to protect taxpayers and the economy from another shock. "Too big to fail" must be put to rest.

Plain vanilla banking — checking and savings accounts, credit cards, consumer loans and the like — is one thing. Casino banking is another. Investing in risky, unproven ventures should not enjoy the implicit guarantee of a government bailout if things go bad. Failure should be an option.

The government's $700 billion bank bailout saved the financial system at a precarious moment. But unless there are new limits on both the activities and market share of certain colossal institutions — the Morgan Stanleys, Bank of Americas and JPMorgans — the lessons of this dark period will not be learned.

The Volcker Rule, named for former Federal Reserve Chairman and now presidential adviser Paul Volcker, would ban megabanks from investing in or sponsoring a hedge fund or a private equity fund or from operating proprietary trading in their own accounts.

President Barack Obama also wants limits on the excessive growth of market share of liabilities, stricter capital and liquidity requirements and a process for liquidating an institution deemed critical to the overall system.

Bank executives will resist cleaving off some of their parts. But it must be done. The big investment houses should be allowed to innovate, but they should no longer expect a taxpayer bailout if their high-risk trading schemes go south. "Too big to fail" encourages fecklessness.

We agree with the recent observations of two independent voices, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, Mo., and Simon Johnson, a prominent economist at MIT.

"Beginning to break them, to dismember them, is a fair thing to consider," Hoenig told a meeting of economists recently.

And Johnson insists that Congress must seize the moment before the opportunity for reform is lost. The next crisis, he warns, will chew up an even larger share of the economy — a price we may not be able to afford.

"Don't base your financial system on unconditional risk," he told National Public Radio last month. "Fix it now. Don't wait."

The best fix is making clear to the gamblers that their bets will no longer be covered by the American taxpayer. Break up the banks.

REPRINTED FROM THE MILWAUKEE JOURNAL SENTINEL.

DISTRIBUTED BY CREATORS.COM