Should the Government Break Up Big Banks Into Smaller Ones?

bank vault; mbrand via Flickr

Question: Can the government loan the FDIC money (which banks will pay back through the FDIC) to take over Citibank and Bank of America, et al., pay off the customers, and break up the banks into regional banks that are not too big to fail?

Paul Solman: Hey, the FDIC is good for the money. As we pointed out in our piece on how the government comes up with its money, they can and will create what they need out of thin air.

Breaking up the banks is indeed an idea whose time seems to be coming. You read more and more about it from thoughtful commentators. How quickly things change.

Back in the early ’90s, when the Soviet Union was dissolving, I approached a number of top economists about what lessons the USSR needed to learn. One – it may have been Henry Rosovsky of Harvard – said: “diseconomies of scale.” That is, despite the promise that ‘big is efficient’— the Soviet model — a company can get so big as to become INefficient. Even dangerously so. Remind you of anything more recent?