The government and defenders of the status quo are making two main arguments as to why we can’t break up the big banks and financial giants such as AIG:
- The U.S. would have to take over the banks in order to break them up, and that would be socialism
- The U.S. doesn’t have legal authority to break up the big banks
I will address these in turn.
Is Breaking Up a Financial Giant Socialism?
As you’ve heard ad nauseum, a lot of top economists and financial experts believe that the economy cannot recover unless the big banks are broken up in an orderly fashion. (If you haven’t heard, here’s a partial list:
- Nobel prize-winning economist Jospeph Stiglitz, MIT economics professor Simon Johnson and Federal Reserve Bank of Kansas City President Thomas Hoenig (and see this)
- The head of the FDIC, Sheila Bair
- The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
- Economics professor and senior regulator during the S & L crisis, William K. Black
- Leading economist, Nouriel Roubini
- Well-known economist, Marc Faber
- Nobel economist, Ed Prescott
- Dean and professor of finance and economics at Columbia Business School, and chairman of the Council of Economic Advisers under President George W. Bush, R. Glenn Hubbard, and Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales
- Economics professor Thomas F. Cooley)
But many argue that it would be wrong for the government to break up the banks, because it would have to take over the banks in order to break them up.
This is true. But government regulators in the U.S., Sweden and other countries which have broken up insolvent banks say that the government only has to take over banks for around 6 month before breaking them up.
In contrast, Bush and Obama’s actions mean that the government is becoming the majority shareholder in the financial giants more or less permanently. That is – truly – socialism.
Breaking them up and selling off the parts to the highest bidder efficiently and in an orderly fashion would get us back to capitalism much quicker.
Does the Government Have the Power to Break Them Up?