“Too Big To Fail” Should Mean “Too Big To Stay Together”

While I haven’t seen much analysis of the legislation Paul Kanjorski (D-Pa.) is offering up and am suspicious of it, because he’s a liberal Democrat, I do agree in principle with the idea of what he’s trying to do here:

Rep. Paul Kanjorski has proposed dramatically expanding the power of federal regulators to dismantle large financial firms whose failure could threaten the entire economy.

His amendment to a financial reform bill, unveiled Wednesday morning, has been widely anticipated – and roundly criticized by the financial industry that believes it goes way to far.

“No firm should be considered to be ‘too big to fail.’ Financial firms that want to play in a casino need to have their own resources to cover their bets and not assume that tax dollars are available in reserve if their bets fail,” said Kanjorski, chairman of a key subcommittee of the House Financial Services Committee.

…The amendment would also:

– Allow federal regulators to look beyond just the size of firms and use scope, scale, exposure, leverage and interconnectedness of the firm’s financial activities to determine whether it should be broken up. The bill does not cap the size of financial institutions, Kanjorski says.

– If the firm is deemed to be a high risk to the banking system, regulators could impose tougher conditions on the firm, mandating that it stop certain activities, including mergers and acquisitions.

Currently, the default government position seems to be that if a firm is “too big to fail,” and yet, is about to go under, we need to pump taxpayer dollars into it to keep it afloat. Not only does this waste extraordinary amounts of our money, it rewards failure. The last thing we should be doing is giving taxpayer dollars to firms that are being run into the ground.

On the other hand, even the most diehard free market economists believe in breaking up monopolies — and if a firm is “too big to fail,” then isn’t it almost by default a monopoly? You can say, “Gee, there are competing firms out there,” but if none of the competitors can pick up the slack, then that one firm has become TOO IMPORTANT.

Having the government take over firms is a disastrous idea, one that can only make things worse over the long haul. If splitting these firms up can keep them viable and keep the government out of the ownership, then it’s an appropriate use of government regulation, good for the taxpayers, good for consumers, and we should find a way to do it.

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