Arnold Kling  

Corrigan's Contradiction

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Simon Johnson writes,


E. Gerald Corrigan in his Dolan Lecture at Fairfield University. Corrigan, former President of the New York Fed and a senior executive at Goldman Sachs for more than a decade, makes three main points.

1. "Large Integrated Financial Groups" - at or around their current size - offer unique functions that cannot otherwise be provided. The economy needs these Groups.
2. Breaking up such Groups would be extremely complex and almost certainly very disruptive.
3. An "Enhanced Resolution Authority" can mitigate the problems that are likely to occur in the future, when one or more Group fails.

These assertions are all completely wrong.

I would add that there is a contradiction between point 2 and point 3. We are supposed to believe that it is impossible to break up big banks now, but we can use "enhanced resolution authority" to break them up during a crisis. That is absurd.


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COMMENTS (5 to date)
Ryan Vann writes:

Seems to me that all is being said is that these groups are too integral to the Economy to fail, and need both protection from and of the government. Must be nice to be in such an advantaged position.

Philo writes:

"Resolution" doesn't mean *breaking up*.

CJ Smith writes:

1. "Large Integrated Financial Groups" - at or around their current size - offer unique functions that cannot otherwise be provided. The economy needs these Groups.

Contrast - "Time Warner-AOL," "GMAC."

2. Breaking up such Groups would be extremely complex and almost certainly very disruptive.

Contrast: Ma Bell; Standard Oil; any U.S. based international accounting firm that spun off it's consulting services from audit and tax.

3. An "Enhanced Resolution Authority" can mitigate the problems that are likely to occur in the future, when one or more Group fails.

Cf.(?): Federal Deposit Insurance Corporation; Resolution Trust; TARP.

It is to laugh....

wm13 writes:

This all seems like a red herring to me, the idea that the problem is "too big to fail." If there is a systemic crisis, it doesn't how big the institutions are: if they are all failing, the government will face extreme pressure to intervene.

For example, look at money market funds. There are hundreds of them, no one of them is very big, their executives aren't all that highly-paid, their customers aren't all that rich, and they aren't leveraged, since all their capital is in the form of stock. Yet this is the industry sector that brought the financial system to the brink of collapse, and the Treasury was forced to guaranty the equity investors (not the creditors, mind you, but the equity investors!) in order to prevent chaos.

Eric Johnson writes:

Well, some said that some of the out-bailed were too interconnected with other firms to fail, not too big to fail.

If so, by god, there must probably be some simple way to narrow their range of interaction with other firms. It seems that free capitalism is excellent and proven, so to keep it as free and unchanged as possible we should do whatever it takes, as long as this action is simple, imposes the minimum possible compliance costs, and is hard to evade using some fancy proxy or whatever.

And those that really were too big should have been bisected when they were bailed. And so that that the break-up wont cost to many jobs, why not bail them out in a rather generous way that leaves them in nice shape? And next time they get too big, bisect them before they wreck the universe, not after.

So it seems to me, an economic simpleton.

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