Save the Economy: Break Up the Big Banks and Shape Up the Regulators

The U.S. economy is still reeling from the financial crisis that exploded in the fall of 2008. This article asserts that the big banks were major culprits in causing the crisis, by funding the non-bank lenders that created the toxic mortgages which the big banks securitized and sold to unwary investors. Paradoxically, banks which were then too big to fail are even larger today.

The article briefly reviews the history of banking from the Founding Fathers to the deregulatory mindset that has been present since 1980. It then traces the impact of deregulation and analyzes in depth the financial innovation that former Chairman Greenspan extolled, but that drove the financial crisis. It traces the growth of the big banks and asserts that breaking up the big banks would improve efficiency, permit risk to be priced appropriately, and eliminate many conflicts of interest, including that of management who pursue greater financial rewards by ignoring the potential for catastrophic risk. It also asserts that regulation cannot be left in the hands of regulators who do not believe in government.