Dialogue with the Alter Ego on the breaking up of the big commercial banks, first drafted on July 28, published on July 31, 2012
Question by Alter Ego of Noah denkt™ (AE): Are you aware of the fact that the man who created Citigroup and who was at the forefront in the earlier fight against Glass-Steagel, Mr. Sanford Weill, is now calling for a breakup of the big commercial banks?
Answer by Noah denkt™ (Nd) : Yes, we are aware of that.
AE: And what do you make of this?
Nd: Well, – this may come as a surprise to you, but we are inclined to second his call.
AE: That, in deed, comes as quite a surprise given your earlier pronouncements on the Volcker initiative! (see: http://www.noahdenkt.com/noahdenktwvolcker.html)
Nd: Well, the truth is that we still believe that it is virtually impossible for any government to avoid situations where the potential failure of large-size financial institutions poses a systemic risk for the entire marketplace. In other words, we continue to think that a situation like 2008 may develop again even with a separation of commercial and investment banks. But what has become apparent in the Barcley’s Libor manipulation scandal and in the JP Morgan risk hedging disaster is that these giant banks simply are too big and unwieldy that anyone could hope to manage them adequately.
AE: Jamie Dimon and others don’t seem to share that opinion.
Nd: That is hardly a surprise since doing so would obviously undermine the center-stage position which they hold in today’s world.
AE: So you do not buy the argument that the management knows best how to serve their shareholder value?
Nd: In this case, no.
AE: And what about the argument that it would be counterproductive in these recessionary times of ours to fiddle too much with the architecture of financial markets, since we need the firepower and dynamic of big, giant banks to get the economy out of the doldrums that it is in for the time being.
Nd: This is a very important argument but it pertains more to the issue as to when these banks should be broken up not if that should happen at all.
AE: Well, given the gigantic debt levels which countries and consumers have to repay, it will probably be decades before the next exhuberant phase can kick in. Don’t forget that some economists argue that the total debt level in the US goes way beyond 100% of GDP which based on historic evidence would probably suggest that it could take half a century before the too-big-to-fail monster can raise its head again.
Nd: We do not believe that it will take such a long time before the next bubble can develop again. But we would be willing to concede that there is no urgency in dealing with the break-up-issue now.
AE: So, why are we discussing this then?
Nd: Because the public debate about this should start as soon as possible.
AE: What difference does it make if we discuss the issue now?
Nd: Well, it helps Jamie Dimon and others to better control the beast that they are charged to deal with if they know that capital punishment for it may be in the making.