I am not yet convinced that breaking up large, complex firms is the right approach. In particular, these firms presumably exist, in large part, because there are scale or network effects that allow these firms to offer certain types of services that have value to their global clients. These benefits might be lost or diminished if such firms were broken up. In addition, the costs incurred in breaking up such firms need to be considered. Finally, the breakup of such firms would not necessarily result in a significant reduction in overall systemic risk if the resulting component firms were still, collectively, systemic.
He cites no evidence about “scale or network effects,” and he knows enough economics to know that those firms need not exist “in large part” because of them. In financial markets where a few basis points can be a tremendous advantage, the too-big-to-fail subsidy can be much more important than any legitimate scale economies. As for considering the costs of breaking up such firms, how does that cost compare to the cost of another financial crisis?
The point that smaller firms could have systemic risk is true, but not decisive. Smaller firms, because they cannot expect bailouts, would act in a more disciplined manner. They and their creditors would have to make decisions knowing that under most circumstances they, not the taxpayers, will bear the consequences.
Were smaller banks subject to many of the same failures during the last recession? Did smaller banks act with more discipline?
I would think the evidence is there to make a judgement.
Echoing DeMeo, MANY small banks received TARP. By “small” I mean “not big”–putting all banks into one of just two categories. Unfortunately I’m not so sure smaller firms can or will expect not to be bailed out.
The problem is those small banks would all try to become big again, too big to fail big.
Y’know, one of the big issues in all this is the lack of a true “picture” or descriptive definition of the total “system” in which financial entities are “systemically related” and by what means or inter-actions so related.