Friday, April 3, 2009

Break up the banks !

Looking for a one paragraph summary of the world financial crisis? Read Joseph Stiglitz’s critical commentary, “Obama’s ersatz capitalism” (New York Times, March 31):
“The main problem is not a lack of liquidity. (…) The real issue is that the banks made bad loans in a bubble and were highly leveraged. They have lost their capital, and this capital has to be replaced.”

One should add: these banks were “too large to fail” and that’s why governments everywhere use taxpayers’ money to bail them out. The question then is, beyond that of technical control of their future operations, should governments allow banks to remain, on average, as big and diversified as they currently are? In that case, a single big financial institution failure will still present a “systemic risk” for the rest of the economy, because the losses would affect a huge number of individual depositors and firms.

Recapitalization is necessary, but breaking up large financial firms in smaller pieces and making “re-specialization” compulsory should have a high priority rank on governments’ agenda. Anti-oligopoly policy anyone?

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