Debate Club

The Largest U.S. Banks Can Still Cause a Disaster


Measured properly, the U.S. has the largest banks in the world – with J.P. Morgan Chase now having a balance sheet around $4 trillion, which is more than 20 percent of our annual GDP. Five big bank holding companies – JP Morgan, Bank of America, Citigroup, Goldman Sachs and Morgan Stanley – operate globally with a combined balance sheet close to the size of the entire US economy.

These banks are much bigger than they – or any U.S. bank – used to be. As recently as 15 years ago, the balance sheets of the biggest US banks combined were less than 20 percent of GDP. Any bank, big or small, can get into trouble and that is true in any country. But the bigger the bank, the more damage that it can do by itself and with a few fellow travelers – both in terms of losses to be borne by taxpayers, and in terms of the depth of the recession and loss of jobs.

The U.S. economy was not built on big banks – we left that mistake to others, until recently. But people running the largest U.S. financial firms managed to get the rules changed from the 1980s and, as a result, their firms bulked up and greatly expanded their range of activities during the big credit boom that led to the crisis of 2008. Today's behemoths are those that became even bigger as a result of the bailouts and other forms of government support they received during that crisis.

[See a collection of political cartoons on the economy.]

The official doctrine that some banks were "too big to be allowed to fail" actually meant allowing them to become bigger. The Obama administration attempted financial reform, but only after the banks were put back on their feet, making them able to deploy massive lobbying resources against meaningful change. Not surprisingly, the pace of reform resembles that of treacle.

After three years of frustration, there are new bipartisan ideas – particularly gaining traction in the Senate – that will responsibly and more fundamentally address the problem of "too big to fail". The latest initiative, led by Sens. Elizabeth Warren, D-Mass., John McCain, R-Ariz., Maria Cantwell, D-Wash., and Angus King, I-Maine, would reinstate a version of the Glass-Steagall restrictions from the 1930s.

Combined with measures to strengthen equity capital and other reforms, the 21st Century Glass-Steagall proposal is exactly what we need. It would force the big five banks to become smaller by restricting the scope of their activities. Gambling with taxpayer backing would become much harder.

[See a collection of political cartoons on the budget and deficit.]

Of course, there is no panacea that will prevent future financial crises. But we can make the financial system safer – this was the remarkable achievement of the 1930s that we should seek to emulate, albeit in a modernized form.

The largest U.S. banks are too big to fail, too big to manage and too big to jail. They have become so large that they threaten stability and prosperity for the rest of our economy – it has taken us more than five years to rebuild from the last disaster they wrought.

Over 100 years ago, the antitrust movement argued that large industrial, railroad and energy companies had become so large that they threatened the health of the U.S. economy. There was a long struggle to put in place legislation that would limit the power of those companies – and to reinstate competition on a more level playing field. We now need to do the same for our largest few banks.

Simon Johnson

About Simon Johnson Senior Fellow at the Peterson Institute for International Economics

financial regulation

Other Arguments

13 Pts
There's No Downside to Breaking Up Banks

Yes – There's No Downside to Breaking Up Banks

Dean Baker Codirector of the Center for Economic and Policy Research

-5 Pts
Consumers Lose If Banks Are Broken Up

No – Consumers Lose If Banks Are Broken Up

James Gattuso Senior Research Fellow in Regulatory Policy at the Heritage Foundation

-19 Pts
Re-Engineer Banks, Don't Break Them Up

No – Re-Engineer Banks, Don't Break Them Up

Allan D. Grody President of Financial InterGroup Holdings Ltd.

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