What Is the Goal Addressed By Breaking Up the Big Banks?

When I read this article by Steve Eisman about proposals to break up the big banks, it struck me that – while not articulated separately – we tend to hear four reasons for doing so.

1. To prevent us from having to bail them out again.

2. Because they are too politically powerful.

3. To address income inequality.

4. To punish them for causing the Great Recession.

The only one of those that was addressed by the reforms that actually passed in the Dodd-Frank bill is #1. Eisman makes a simple but powerful case for what the so-called “big banks” did that led to the bailout. He sums it up with one word, “leverage,” which he defines like this:

Using borrowed money, the financial system made huge bets just when losses were about to explode because of subprime mortgage loans.

He points out that prior to the meltdown, Citigroup was leveraged 33 to one while today it stands at 10 to one and states categorically, “It’s no longer accurate to say that the large banks pose a systemic danger to the American economy.”

While it is true that Wall Street continues to have too much political power, that is not unique to the big banks. If we actually want to strike a blow at big money in politics, we need to cast a much wider net.

Eisman makes some important points about #’s 3 and 4.

Furthermore, no advocate of a breakup has come forward with a plan on how to do it. Large banks are global, complex, integrated institutions. Breaking them apart would be incredibly difficult, long and disruptive, and the banks might have to freeze loan growth during the process, slowing our economy even further.

To the extent that we want to break up the big banks, it is important to not only be clear about how that will be done, but to ensure that the process doesn’t further harm those who are least capable of sustaining additional blows. If, in our zeal to punish the banks, the economy slows even further, those on the bottom end of income inequality could also be punished. Eisman concludes with this:

If we want a stronger economy, improving the distribution and growth of personal income should be our focus. Breaking up the big banks will not help, and might even hurt.

Those who support the idea of breaking up the big banks need to keep that in mind and demonstrate how their plans to do so won’t hurt more than they help.

Nancy LeTourneau

Nancy LeTourneau is a contributing writer for the Washington Monthly.