Too Big to Fail = Too Big to Exist

The Milwaukee Fed's Mr. Clean wants to tidy up systemic risk

The fact that Neel Kashkari was on the front lines during the 2008 financial crisis adds special urgency to his calls to dismantle the major banks, a position that I support.

When the Federal Reserve and U.S. Congress chose to keep the major banks alive and intact, they created huge systemic problems that are adversely affecting the financial markets to this day.

The main problem, as I see it, is in terms of price and competition. Currently, the market for financial services is dominated by a handful of big players who offer relatively few product options and limited price competition. The majors must be broken apart into regional banks that can compete with one another, and compete with other local and regional banks. These smaller banks, being closer to their customers and local businesses, are generally more willing to take a chance and underwrite loans that the majors would not touch. Additionally, more competition will help to improve customer service and lower fees for the retail customers.

Secondly, "too big to fail" carries moral hazard and an implicit guarantee that can distort risk evaluation and decision-making by investors and the banks themselves, exacerbating the "too big to fail" problem.

Finally, we need to restore the firewall that previously existed between depository institutions and investment banks. We cannot allow investments in derivatives to put FDIC insured deposits at risk.

Therefore, on the depository side, the major banks should be broken down into distinct regional banks with new names and a new organizational structures. The original parent bank can retain the investment banking activities, but can no longer accept federally-insured deposits.

This will serve to streamline and invigorate the financial industry, for the benefit of the nation.