Saturday, May 12, 2012

Break Up the Banks

Too big to fail is going to kill the American economy.  This week's fiasco involving J.P. Morgan shows that nothing has changed since 2008.  It tells me the Justice Department needs to do what it accomplished 30 years ago when it broke up AT&T. 

Imagine a world without smart phones and instant communications.  Yes, maybe it would be a better world but if AT&T had been allowed to stay a telecommunications monopoly the information revolution we are currently enjoying would have taken decades longer to come to fruition.  AT&T had no competition to spur change and creativity. 

Right now America is dominated by a handful of banks.  The list isn't very long.  Chase (J.P. Morgan), Citibank, Wells Fargo, Bank of America and U.S. Bank.  Sure there are plenty of strong regional banks and local banks to choose from but one of the big boys catch a cold the smaller banks suffer as well. 

I don't have a clue as to how government can unwind this mess.  In my books commercial banks should stick to a few basic things. Commercial banks should provide business loans, personal loans, home loans, car loans and that's about it.  Complex derivative trading should not be included in what commercial banks engage in.  Leave that garbage to investment banks like Goldman Sachs and Morgan Stanley.  If J.P. Morgan wants to play that game it needs to shed itself of Chase.  

Commercial banks should engage in activities that don't require a PhD in mathematics.  Investment banks should be free to put profits over people but that formula doesn't work in commercial banking and the problem is too many Americans don't know or understand the difference.  If the Justice Department can't do it then Congress needs to get to work and force commercial banks to divest themselves of these trading entities.  The risk should fall on the backs of the Wall Street investors, not on the backs of hard working Americans who foolishly believe their savings institutions are a safe bet.

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