Wednesday, October 21, 2009

Volcker, Stiglitz, King, and Classical Banking

According to The New York Times here , the former Fed chief said the giant banks must be broken apart and separated from risky trading on Wall Street, a view shared by Joe Stiglitz, but not by Alan Greenspan, nor apparently by the White House, including Larry Summers.

At the same time the British get serious about it, and especially Mervyn King, governor of the Bank of England, who called on Tuesday night for banks to be split into separate utility companies and risky ventures, saying it was “a delusion” to think tougher regulation would prevent future financial crises (The Financial Times, October 20).

In this most important debate we side with Volcker, Stiglitz and King, because, among other reasons such as a limited belief in the independence and efficiency of regulations (as the late George Stigler clearly explained), the overall abundance of information in the early 21st century calls for smaller, less diversified corporations, not bigger unfocused and difficult to control ones. “Too big to fail” is the major risk in finance for the near future, and banks are all too willing to go that way again. A modern version of the Glass-Steagall Act is a must in international bank reform.

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