The Case Against Big Banks
By Arnold Kling
My National Review article is now online. I’ve been getting some love from leftwing blogs and some pushback from right-wing blogs.
A few points
1. I don’t want to bring back the 1920’s, or even the 1950’s, with all of the restrictions on interstate banking and such. What I have in mind is splitting up the ten largest financial institutions into, say forty.
2. I do not think that the financial system will be magically stabilized by breaking up banks. There are plenty of things that could still go wrong.
3. The advantages of breaking up the largest banks would be subtle. One is that an individual bank would be less likely to see itself as too big to fail. A second possible advantage is that there would be more diversity of thinking within the financial system. One of the more disturbing aspects of the housing finance boom/bust was the sheer groupthink involved. As I have shown in my published writing on the financial crisis, the key financial industry executives and regulators all “knew” the same things, which turned out not to be true. Maybe if there had been forty major financial institutions instead of ten, they would not have all shared the same outlook. It is possible (by no means certain) that some independent thinking might have found its way into the financial community, and perhaps even the regulators would have been open to diverse points of view.