Thursday, December 22, 2011

To create jobs, break up the too big to fail banks

It could well be that the most meaningful way to create jobs in America is to break up the too big to fail banks.

When even the conservative leaning New York Post's Charlie Gasparino calls for the too big to fail banks to be broken up, you know the time has come for a good idea to be implemented.

The monster banks are against this, of course.  They want to return to the good old days where they make scores of millions of dollars for themselves individually if their over-leveraged, hyper risky activities succeed, but stick the taxpayers with the losses if they fail.  

The regulators and rating agencies were unable to see inside the labyrinthine risky business models prior to the financial meltdown, and I have no doubt that they have the same problems today.

It seems to me that businesses that are too big to fail are also too big to manage and too big to regulate and too big to rate accurately.  

Gasparino offers the obvious recommendation: 

The obvious way to force the banks to get small and fast is to again split commercial from investment banking — that is, making it so that no bank can roll the dice in the securities markets if it wants its deposits backed up by federal insurance.

His analysis is that this would finally free up capital for making loans to small and medium sized businesses - which is where job creation comes from.

So, what can the Federal government do to create job?  Stimulus spending has only limited results, and reducing taxes adds to an out of control deficit, but breaking up the too big to fail banks might actually be very helpful.