Break them up March 24, 2012 at 8:18 am

From the final paragraph of a wonderful essay by Harvey Rosenblum, Dallas Fed executive vice president and director of research:

The road to prosperity requires recapitalizing the fnancial system as quickly as possible. The safer the individual banks, the safer the fnancial system. Te ultimate destination—an economy relatively free from financial crises—won’t be reached until we have the fortitude to break up the giant banks.

Go read it.

7 Responses to “Break them up”

  1. […] Deus Ex Macchiato provide a link to one of the finest summaries of the financial crisis I have read ; “Choosing the Road to Prosperity”  by Federal Reserve Bank of Dallas Director of Research  Harvey Rosenblum. […]

  2. […] Deus Ex Macchiato provide a link to one of the finest summaries of the financial crisis I have read ; “Choosing the Road to Prosperity”  by Federal Reserve Bank of Dallas Director of Research  Harvey Rosenblum. […]

  3. Do we really think it’s wise to break up large banks?

  4. Yes, I do. I think a financial ecosystem with 40 medium sized players with different business models is likely to be significantly more robust than one with 10 larger players all with the same business model.

  5. Amen.

  6. Problem i see is that when you start off with 40 medium size banks, eventually a few will have a better business model than the others. Adn then the business model gets copied (due to shareholders seeing the return at the more successful banks and wanting the same) which leads to a convergence to 40 banks with (more or less) the same business model. Basically what we saw in the run-up to the financial crisis. After which the take-overs can begin due to economy of scale.

    In other words: I agree that ‘evolution’ thrives on diversity, but how do you prevent convergence to one (or 2/3) business model?

  7. […] asked a good question in comments to a prior post: when you start off with 40 medium size banks, eventually a few will have a better business model […]