Should Banks be kept Small?
By Arnold Kling
Tyler Cowen does not see much help in keeping banks small. I agree with Simon Johnson, who thinks that big banks are too powerful politically.
I think that the issue does pretty much boil down to political economy. Big banks are likely to be more powerful politically when they get in trouble. For small banks to be powerful politically when they get in trouble, a lot of them have to get in trouble at once. That can happen, of course, but it is more likely to result from an economy-wide shock than from idiosyncratic risk-taking. I don’t think small banks are a perfect solution, but I think that big banks are going to wind up with the same quasi-public, quasi-private status as Fannie Mae.