Big Banks

Of all the economists, journalists, and pundits who have written on the financial crisis, Johnson and Kwak are the ones who most strongly emphasize the political dimension of financial regulation. They see large financial institutions as capable of creating a political juggernaut. Hence, their main policy proposal is to break up large banks. As you know, I have been brought around to their point of view, which has been articulated on their blog.

via Baseline Scenario: The Book, Arnold Kling | EconLog | Library of Economics and Liberty.

There is a growing consensus that limiting the size of banks would be a good thing. I’m not so sure. Banking, like all other industries, has evolved. In business evolution, more successful approaches displace less successful approaches. The big banks didn’t just materialized – they resulted from doing some things better than alternative arrangements. This might be due to economies of scale, geographic diversification, or internal synergies – who knows? Before politicians eliminate “big banks”, it would be good to know what we’re giving up. Every decision is a trade-off and to make trade-offs intelligently, you have to understand both sides.

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