Obama’s Plan To Be Judged By A Goldman Breakup
Commentary by Simon Johnson, first appearing in BusinessWeek
At the broad level, there was much to applaud in
yesterday’s announcement from the White House regarding potential new
constraints on the scale and scope of our largest banks.
After more than a year of tough argument, Paul
Volcker has finally persuaded top aides to President Barack Obama that
the unconditional bailouts of 2008-2009 planted the seeds for another
major economic crisis. Unfortunately, in their scramble to announce
this major policy shift ahead of Wall Street’s bonus season, the
administration didn’t line up all relevant details.
In particular, the White House background briefing
yesterday morning -- while somewhat ambiguous -- gave listeners the
strong impression that these new proposals would freeze the size of our
largest banks “as is.” This makes no sense. Why would anyone regard 20
years of reckless expansion, a massive global crisis, and the
most-generous bailout in recorded history as the recipe for creating
There is no evidence, for example, that the increase
in bank size since the mid-1990s has brought anything other than huge
social costs in terms of direct financial rescues, the fiscal stimulus
needed to prevent another Great Depression, and millions of lost jobs.
The administration has most evidently not done a
great deal of other preparatory work. How will off-balance-sheet
activities be treated? Should some hedge funds also be regarded as too
big to fail? And why would merely controlling proprietary trading be
enough to de-risk out-of-control behemoths, such as Citigroup?
Still, we should treat the next few weeks as the
public- comment phase for potentially serious principles and an
opportunity to press for workable details.
The big banks, naturally, are already hard at work
pushing in the other direction. This is actually good and exactly what
we need. The banks have hidden behind their lobbyists and
disinformation managers for too long. The administration has decided to
take the fight to them, face-to-face, with the full backing of a
president at last willing to press for change. The goal should be to
flush both the big bankers and their Republican -- and Democratic --
backers into the open.
There are sensible people on both sides of the
political aisle on this issue. But there is also Senator Richard Shelby
of Alabama, the ranking minority member of the Senate banking
committee, who has been arguing that the morass of massive financial
institutions can be handled through minor modifications of our
Not Like Canada
This is as nonsensical, and as unconnected to
reality, as the view -- also current among some pro-banking
constituencies - - that the U.S. can just become more like Canada, in
the mythical sense of having four big banks that are well regulated.
Please, just spend some time with people who know the facts and review
in detail the breakdown of risk management at Canada’s greatest
President Obama finally has economic logic and solid
history on his side. If he comes out clear and strong on this issue in
his State of the Union address on Jan. 27 and in all the ensuing
congressional discussions, he will flush out into the open the
self-serving greed and frank stupidity that underpins the idea that
bigger finance is good, unregulated big finance is better, and today’s
mammoth unfettered global banks are best.
This could turn out to be a huge policy change with
important and positive ramifications around the world. But it is not
for the faint of heart or weak of mind.
The serious debate with big finance is just
beginning; it will get very nasty, hundreds of millions of dollars will
be spent, and everyone, in the end, must take a side.
What we need is for sensible legislation to come to
the floor of the Senate and for all senators to go on the record, in
A public debate of historic proportions -- the kind
that shaped this republic -- will set up the Democrats for the midterm
elections. If you would like to run on a pro-too-big-to- fail platform,
As we drill down into the details of ideas for
breaking the economic and political power of oversized banks, we need
this litmus test against which serious suggestions should be judged:
Does a proposal, at the end of the day, imply that Goldman Sachs should
break itself up into at least four or five independent pieces, with the
biggest being no more than 1 percent of gross domestic product, or
roughly $150 billion?
If the answer is yes, we are making progress in
moving our financial system back toward where it was in the early
1990s, when it worked fine (and Goldman was a world-class investment
bank) and was much less threatening to the global economy. If the
answer is no, we are merely repainting -- ever so gently -- the
deckchairs on the Titanic.
(Simon Johnson, a professor at MIT’s Sloan School of
Management and former chief economist of the International Monetary
Fund, is co-author of “13 Bankers” to be published in April 2010. The
opinions expressed are his own.)