Thursday, April 1, 2010

Time to Bust Up the Mega-Banks?

Did the recent financial meltdown reveal that the U.S. was a lot like a Third World economy -- like, say, Indonesia in the 1990s, when connections to the ruling elite were all important to enterprises that wanted to prosper? 

Consider this analysis of the recent Wall Street bailout from former International Monetary Fund chief economist Simon Johnson: “Washington has behaved like an emerging market government in the 1990s – using public resources to protect a handful of large banks with strong political connections.”

Johnson and his co-author James Kwak, celebrated bloggers with "The Baseline Scenario" (http://baselinescenario.com/) and now with The Huffington Post, have just published a cri de coeur to bust up this cozy political arrangement, which the authors say extends to both major political parties. In 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (Pantheon, $26.95) the authors argue: “If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.”

Socialism! Anarchism! And shades of Alan Greenspan, who not so long ago commented that if some banks today are "too big to fail...they're too big."

So what would be an acceptable size for the six megabanks (Bank of America, JP Morgan Chase, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley)? These authors say none should probably have assets exceeding 4% of GDP, or roughly $570 billion in assets, and no more than 2% of GDP, or $285 billion, in the case of investment banks. Pretty reasonable I'd say.

For my full review go to: http://www.dailyfinance.com/story/books-daily-finance-too-big-to-fail-too-big/19422136/

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