Wednesday, October 24, 2012

Simon Johnson — Too Big To Handle

In the discussion of whether America’s largest financial institutions have become too big, a sea change in opinion is underway. Two years ago, during the debate about the Dodd-Frank financial-reform legislation, few people thought that global megabanks represented a pressing problem. Some prominent senators even suggested that very large European banks represented something of a role model for the United States.
In any case, the government, according to the largest banks’ CEOs, could not possibly impose a cap on their assets’ size, because to do so would undermine the productivity and competitiveness of the US economy. Such arguments are still heard – but, increasingly, only from those employed by global megabanks, including their lawyers, consultants, and docile economists.
Everyone else has shifted to the view that these financial behemoths have become too large and too complex to manage – with massive adverse consequences for the wider economy. And every time the CEO of such a bank is forced to resign, the evidence mounts that these organizations have become impossible to manage in a responsible way that generates sustainable value for shareholders and keeps taxpayers out of harm’s way.
Wilbur Ross, a legendary investor with great experience in the financial services sector, nicely articulated the informed private-sector view on this issue. He recently told CNBC, “I think it was a fundamental error for banks to get as sophisticated as they have, and I think that the bigger problem than just size is the question of complexity. I think maybe banks have gotten too complex to manage as opposed to just too big to manage.”
Project Syndicate
Too Big To Handle
Simon Johnson | former chief economist of the IMF, professor at MIT Sloan, and a senior fellow at the Peterson Institute for International Economics


Butch Busselle said...

Gee Tom, does this mean that not everyone at the house of Peterson is a virulent opponent..?

Tom Hickey said...

Milton Friedman once observed that there is good economics and bad economics and the task is to distinguish between them. I'll agree with anyone that I think says something that is near correct without implying I agree with everything the person says.

Often people get the diagnosis right, for example, but get the etiology and treatment wrong.

James said...

Considering Mr. Ross’s use of the word “sophisticated”, I would consider an organization that is too complex to manage to be the opposite of sophisticated, as are its managers, but rather ignorant and completely out of control, creating unintended consequences with every action. I do agree with his conclusion.