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August 25, 2010
Failure of Financial Reform to Break Up Big Banks Leaves Economy at Risk
    by Robert Kropp

Former International Monetary Fund chief economist Simon Johnson claims that defeat of Brown-Kaufman amendment leaves financial system vulnerable.


In a recently published piece in the New York Times, Simon Johnson, former chief economist for the International Monetary Fund (IMF), asserted that the "distorted system" that the Dodd-Frank financial reform bill left in place "most likely leads to further financial excess – followed by crash and painful rounds of job loss."

A longer version of the piece appears on
The Baseline Scenario website.

The distorted system to which Johnson refers remains in place because of the Senate's failure, by a vote of 33-61 on May 14th, to pass the Brown-Kaufman SAFE Banking Amendment to the Dodd-Frank bill. The amendment would have required the nation's six largest banks—Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo—to hold no more than 10% of insured deposits and liabilities of no more than two percent of the Gross Domestic Product (GDP).

If the amendment had passed, in other words, the Too Big to Fail banks would be broken up.

According to Johnson, passage of the Brown-Kaufman amendment was necessary, "given the political power of these banks and their manifest ability to individually (and collectively) wreak great damage."

Instead of a provision for breaking up the biggest banks, the legislation as passed contains a provision for "resolution authority," which would allow the government to intervene to prevent systemic risks by putting a failing bank into receivership and selling or transferring its assets and liabilities.

Johnson also asserted that members of the Obama administration privately opposed the amendment, by claiming that "Brown-Kaufman would somehow have led to job losses and lower tax revenue."

However, quoting
AFL-CIO president Rich Trumka, Johnson wrote, "It was the financial crisis and the reckless speculation of too big to fail financial institutions that caused 8 million working people to lose their jobs and huge drops in the stock market and losses to pension funds."

Finally, Johnson described the argument that breaking up the biggest banks would damage the global competitiveness of US banks as "completely implausible." Brown-Kaufman, Johnson wrote, would have reduced the biggest banks "to a size they last had a decade or so ago, when both the financial system and the nonfinancial part of the economy were much healthier."

Again quoting Trumka, Johnson concluded, "By voting against the amendment, you voted to continue the status quo, to avoid addressing the problem of too big to fail institutions and to leave our economy at risk of another financial crisis precipitated by the failure of a systemically risky institution."

 

 
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