By Simon Johnson
The debate over megabanks and – in the aftermath of the 2008 financial crisis – how to deal with all the problems associated with “too big to fail” in the financial sector has not been easy for many politicians. The problems and potential real solutions do not map readily into the standard left vs. right divide in American politics.
The left generally wants the state to do more, and these days most of the right usually wants the state to do much less. But in this space regulators are “captured”, meaning that too many of them are effectively working to promote the interests of the big banks rather than to limit the dangers to the rest of us – so “more regulation” does not make much sense. And these big banks have a strong incentive to get even bigger – it’s their size that gives them economic and political power. If you leave these banks to their own devices, they will become even bigger and blow themselves up at greater cost to ordinary citizens (see Western Europe for details). So “no regulation” is also not an appealing proposition.
As a matter of presidential year politics, there is a remarkable convergence between President Obama and Mitt Romney, the Republican frontrunner. Both think that we can tweak the rules to keep the banks from becoming dangerous. The Obama administration calls their approach “smart regulation”, while Mr. Romney has spoken of repealing the Dodd-Frank financial reform legislation (although his website is devoid of any further specifics). But as far as anyone can see, their proposed approaches for the next four years are very similar – relying on the state to play a particular oversight role that has not gone well in recent decades. They are both “statist” in this very particular sense. Continue reading