Knights Who Say…

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The Knights are getting organized up in here.  The new political organization A New Way Forward has as one of its 3 central principles:

DECENTRALIZE: Banks must be broken up and sold back to the private market with new antitrust rules in place– new banks, managed by new people. Any bank that’s “too big to fail” means that it’s too big for a free market to function.

Preach it!  Your efforts are very welcome to me, Bernanke, Yglesias, Paulson, Spitzer, Klein, Volcker, Simon Johnson, and Sheila Bair.

(Their other 2 principles are almost as good: Nationalize and Reorganize.)

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5 Responses to “Knights Who Say…”

  1. Whitney Says:

    I have a question.

    My profile: I am intentionally ignorant of most things economic. Partly because I see money as a gift (from God) that isn’t really mine, and because I’m fortunate enough to not worry about it. I’m usually a tight-wad–and my husband had to literally BEG me to invest in mutual funds and only when I made him promise I would never, ever have to look at the accounts. I “control” the money in our household, and I know where almost every penny goes. I don’t know what Joe eats when he goes to a restaurant on deployment…that’s the extent of my flexibility. (Yes, you can feel sorry for my husband, but he’s actually wonderful about it. It does mean that he has very little fiscal responsibility, and with his frequent lengthy trips away, he’s good with that.) I have a ridiculous “emergency fund” that if I never use…OK. We still can’t spend it. That’s my approach…only given so that you can see my approach to money is “enjoy what I’ve been blessed with, but live below my means and protect myself in the event of emergency.”

    To my question: How do you define “too big to fail”? Are the manifest markers? Or is it a latent construct? And if it is a latent theoretical, how do you tell when a bank “gets there”?

  2. urbino Says:

    The way I define it — and the way these other folks seem to define it, as well — is that any private institution that is so big that it can’t fail without causing a crisis throughout our entire economy, such that we as a society have to guarantee its continued existence, is simply too big. Such entities are, as New Way Forward says, anti-democratic. They’re also anti-market.

    They are to democracy and markets what ultramassive stars are to gravity and space-time. Just as the latter warp the space and time around them, these ultramassive financial institutions warp the polity and markets around them. The rules that govern everyone and everything else cease to exist in the vicinity of these things; you enter this alternative reality every bit as weird as Special Relativity. And when these ultramassive institutions collapse, they become economic black holes, dragging everything around them down with them.

    It seems to me it’s in our interest to prevent such institutions from existing.

    I don’t know enough about political economics to say what the manifest markers are, but my sense is that they do exist and would actually be easy for someone who knows what they’re doing to identify. As I said in my original post in this series, this seems to me directly analogous to (and probably simpler than) the rules we’ve put in place to prevent the formation of monopolies. Those rules have worked very well. I see no reason we couldn’t put an equally effective set of rules in place to prevent these dark star financial institutions. (In fact, the Glass-Steagall Act seems to have done a pretty good job of it for 60 years, before we repealed it.)

  3. Whitney Says:

    Thanks. I haven’t read the other threads….I don’t do much homework. 🙂

  4. urbino Says:

    Heh. The only one that says anything substantive is the first one (the link on the word “me” in this post). All the others since then have just been me taking note of various other people who’ve gone on the record saying too big to fail is just too big.

  5. Knights Who Say… (Twofer Edition) « Hungry Hungry Hippos Says:

    […] By urbino James Kwak, highly respected economics blogger, catches up with me, Bernanke, Yglesias, Paulson, Spitzer, Klein, Volcker, Johnson, Bair, and A New Way Forward.  First he rues the fact, as I did, that the Obama administration seems fixated on the “to […]

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