Wall Street Journal Supports Break-Up Of Big Banks

Add the Wall Street Journal editorial board -- of all people -- to the growing ranks of those calling for a restoration of barriers between commercial and investment banking.

In an editorial today, the Journal's anti-regulation free marketeers threw their weight -- albeit in a back-handed way -- behind government limits on "risk-taking" by commercial banks.

The editorial was mostly an assault on Democratic proposals described as offering "unlimited taxpayer funds" to bail out "just about anyone... engaging in finance of one kind or another" in a way that "would entrench moral hazard (and cheaper funding costs for the likes of Goldman Sachs) even deeper into the financial system."

But the editorial concluded: "The other way to reduce moral hazard is to limit certain kinds of risk-taking by institutions that hold taxpayer-insured deposits, as suggested by former Federal Reserve Chairman Paul Volcker and Bank of England Chairman Mervyn King."

That was a reference to Volcker and King's idea to restore the separation between Wall Street investment banks and Main Street commercial banks. "This has its own problems. But unlike the emerging plans in Washington, it is credible and would give capitalism a fighting chance to survive regulatory reform."

Volcker, King, former Citigroup CEO John S. Reed, and Nobel laureate economist Joseph E. Stiglitz are four financial and economic luminaries advocating for at least a partial return to Glass-Steagall, a Depression-era law that banned commercial banks from underwriting stocks and bonds. It was repealed in 1999 at the urging of, among others, Larry Summers, President Barack Obama's chief economic adviser.

While progressive economists such as James K. Galbraith and Dean Baker support a return to at least some tenets of Glass-Steagall -- on the premise that banks with taxpayer-guaranteed deposits shouldn't be engaged in risky trading -- the Obama administration does not. The White House wants to regulate the behavior of these banks, rather than break them up.

For the Journal's editorial page to be taking a more pro-regulatory position on any issue than the Obama White House says a lot about our times.

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Comments

[Thaigold]

As an afterthought for President Obama - you have reneged on your promises to your constituencys. Please; rein in these vultures, after all they are the seeds of your discontent and our national woe.

[calkleen]

If congress would, it could just do what the constitution says its job is----run our banking system, Why not opt out of "the boys in the boiler room" club and take back the Federal Reserve 's franchise. Article 1. Sec. 8, Par 5 of the constitution expressly charges Congress with "the power to coin money and regulate the value thereof". As presently setup Congress is deprived of its sovereignty, and the systems of checks and balances of power set up by Jefferson in the Constitution have been (sold?,leased?, stolen?.)infringed.

[holyghostie]

Goldman Sachs clearly has benefited from the taxpayer this year. The easy money from the fed window, TALF, TARP, the AIG bailout at 100% on the dollar, and the defacto knowledge that no matter how risky the bet, THE GOVT will make the taxpayer cleanup the mess for Goldman.

So profits and bonuses are PRIVATIZED on Wall Street and LOSES are SOCIALIZED.

These big institutions like Goldman should set aside at least $3 billion dollars from their bonus pool and give it to the treasury on behalf of the TAXPAYER. The TAXPAYER deserves the bonus for their hard work funding GOLDMAN this year.

[PragmaticStatistic]

The banks do need to be broken up into separate banking, investment and insurance companies to prevent this type of systemic risk from happening again.

However, this is not a simple task. The only way I see that the "too-big-to-fails" can be broken up, and protect our multi billion dollar investment in them, is to first nationalize them and require all the employees to remain with the firm until the break up is complete. The reason why I see this as necessary is that we need to do more than just break up the physical companies. We need to untangle the liabilities of the investments the banks share ownership in, that integrated the banking system in a way that one bank's problems became another bank's nightmare. As a result, one unstable bank was able bring down several of its investment bundled partners. Then there is the question, how do they do this time consuming and profit-less unbundling proceedure while continuing to do normal business in order to make a profit?

Then there is the issue of credit default swaps, where investors bet that the "too-big-to-fails" are going to fail or be broken up. What impact that may have on our wallets is uncertain.

[Joker Jam]

we need more outrage by the main-street media regarding squandered tax payer dollars for bank bailouts

good articles: http://financeopinionss.blogspot.com

more jobs needed too. Krugman is right in that we need a second stimulus.
The Obama cabinet needs to be overhauled by replacing Geithener, Hillary & Summers

[holyghostie]

The Wall Street Journal should lend their support to the NY TIMES contention that Goldman Sachs owes the American taxpayer $3 billion dollars from their bonus pool. We the taxpayers deserve the bonus for allowing low interest rates to Goldman at the Fed bank window...and because of our defacto
Taxpayer guarantee that we will cover Goldman's risky bets.

I won't even get into Geitners AIG bailout...why did the taxpayer have to make Bank bondholders 100% whole? If I make a bet on Argentina, Brazil or Japan with my own money on a bond. Will Geitner give me a refund?

[rpr]

As much as I dislike the WSJ - any company that's too big to fail without damaging the economy needs to be split up.

[SecretSister]

I second that.

[Bruce Waren]

I agree.

[mcmutter]

During the Bush years banks were merging every month. We should have known that was nothing but trouble.

[World Citizen]

LOL only because the repeal of Glass-Steagall which allowed the merger was signed in 1999 by Clinton.

[RoloTomassi]

And your point would be...? It was a bill signed by Slick Willy, but it was a bill built and designed by free market fundies, for free market fundies...and while labeling such as a bi-partisan cluster f#%k, simple observation reveals that there are far more of those leand hard right than anywhere else.

[Papa Swamp]

Errr banks are still merging. Who do you think is swallowing up all the failed and failing ones?

In the happy news front...the FDIC is now in negative territory (-$8.2 BILLION) only the second time EVER in history....isn't that special.

[kfdan]

"In an editorial today, the Journal's anti-regulation free marketeers threw their weight -- albeit in a back-handed way -- behind government limits on "risk-taking" by commercial banks." This is suggests an intelligent recognition that the route being followed is a mad dash for the cliff-side, a truthful understanding that banking casinos are not a good thing for the economy in general, or a short-term mental lapse into honesty that will eventually lapse back into support for the powers that be! What is it?

[sophistwatch]

The WSJ is no longer a credible source of finacial news.

[lazercat2008]

Tax too big to fail until it becomes too expensive to be big.

[themuse]

And while we are splitting up the financial industry, we should do the same to the mega media conglomerates, like Rupert Murdock's media empire.

[Bruce Waren]

I agree! There should be regulation on the news media and Faux should be made to change their names to Fox Entertainment Bogs instead of "news" and should be disqualified from owning the WSJ. It would be a good start, anyway.

[Washington Kos]

This is the fault of Bush policy

good articles: http://financeopinionss.blogspot.com

all this free market capitalism & globalism backfiring

[World Citizen]

Aren't you guys sick of pointing at the repubs and repubs pointing at dems? From my view in the middle, it's quite sickening to see such partisanship. You forgot about Clinton's era of irrational exuberance which brought in the massive increase of H1B workers? You also forgot that he signed the repeal of Glass-Steagall? Both sides, because both sides have been bought by Wall Street created this problem. So, enough already. Move on and pay attention to solutions more than the past !

[RoloTomassi]

The only "view" available from the middle [which, BTW, isn't really defined by these pretend political parties], is a cavern of darkness, located between the moons of uranus.

[xilduq]

WSJ, late to the dance. As usual.

[martiniandabotoxchaser]

Not only should they break up the big banks but they should split the lending function from the investment banking function. The excessive gambling (hedges, futures, options....) became a thing when commercial banks could use their capitalization to back investment banking functions. Time for the return of Glass-Steagall. The events of today are similar to those leading to the Great Depression....those events split the commercial and investment banks...all was well until they were rejoined.