A few thoughts on the break-up-the-banks critique

A few days ago I posted some thoughts on a talk Joseph Stiglitz gave to AOL Daily Finance last month on the need to reshape the law to toss the folks behind the financial crisis in jail. At the time I mentioned in passing that Stiglitz was reaching for a draconian structural solution -- recasting the laws -- but that he had relatively little to say about reforming regulation. Why was that? It's not that Stiglitz is not familiar with financial regulation at a fairly sophisticated level. But it is as if he has lost faith not only in the regulatory apparatus that currently exists, but also in the entire notion of the administrative state that began to appear in the U.S. early in the 20th century as a counterbalance to enormous corporate interests. He seemed to want to replace regulation with hard and fast legal remedies, which in turn were based on the norms of the community -- that is, on politics.

Stiglitz isn't alone. Much of the discussion since the collapse of Lehman Brothers has swirled around dramatic structural remedies. Not long after Lehman Brothers collapsed, The Wall Street Journal's Dennis Berman suggested shuttering all the big banks and then creating new banks, without the debilitating burden of bad loans. More realistically, there have been proposals to break up the big banks, turn them into utility banks, or to re-impose Glass-Steagall. But behind many of these ideas is a set of assumptions about what exactly happened that is deeply political. In their book "13 Bankers," MIT's Simon Johnson and his blogging partner at the Baseline Scenario James Kwak make two related arguments about size and power. As banks consolidated and grew larger, they assumed greater political power, shaping the laws and regulations to their own greedy ends -- a theme they share with Stiglitz -- and "capturing" regulators in the process. In their view, a takeover of the government took place; an oligarchy of crony capitalists arose not unlike the tight links between ruling families and financial institutions in the emerging markets. Matt Taibbi in Rolling Stone provided his own gloss on this by placing Goldman, Sachs & Co. not only at the conspiratorial center of this bubble, but of bubbles going back to the Great Depression. Government Sachs became a popular meme.

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