Continuing the debate of whether we should break up the big banks to avoid “too big to fail” bailouts, Andrew Redleaf and Rich Vigilante respond to my interview with Arnold Kling.
Kling, Redleaf, and Vigilante all agree that the big banks are not free market players. They’re quasi-governmental figures that get subsidizes loans from the government, have employees that float in-and-out of government, and get bailed out when they fail.
All agree that bank failures are inevitable.
But Kling thinks that if bank failures are imminent, the only way to avoid bailouts, is to cap the size of the banks to a level where their failures won’t pose systemic risk. And he isn’t worried about any loss of banking efficiency or losing the banking community to the rest of the world.
Redleaf and Vigilante think that bank failures can be minimized, and bailouts therefore minimized, by forcing banks to be totally transparent. They would require banks to disclose all their holdings, all their assets, all their positions – down to the stock certificate number. With this kind of transparency, the free market will control bank failures say Redleaf and Vigilante.
Redleaf and Vigilante seem to think that with perfect transparency, bank failures and the systemic risk they pose, will be minimized. I still think this is overly optimistic. Whether because of bad info or bad judgement, banks will always fail. And as long as big banks are failing – they’ll pose systemic risk – and the Feds will be tempted to bail them out.