Too Big Too Fail Will Result in More of the Same Problems

(Or, Why the FIRE Economy Needs a Standard Oil/AT&T Solution)

Too Big to Fail" (TBTF) most certainly will result in "More Of The Same Problems" (MOTSP) again and again in the future unless we put out the FIRE economy.

We are doomed to repeat the present mistakes if, for example, solutions today deemed reasonable and plausible involve BIG financial institutions becoming BIGGER by merger, acquisition, shotgun marriage or government intervention.

While JP Morgan Chase picking up the pieces of Bear Stearns, Bank of America buying Countrywide and Merrill Lynch, and whatever solutions are crafted for Fannie Mae/Freddie Mac, AIG, Washington Mutual, Wachovia Bank, Morgan Stanley, et al, all may seem reasonable, possibly even prudent in the short run, these decisions leave in place even larger institutions that are "way too big to fail" (WTBTF) and "much too systemically important" (MTSI).

These mega-banks, -brokerages and -insurance companies, with more concentrated economic power and national market share, will have less concern with moral hazard in the future, knowing they always will be WTBTF and MTSI and knowing the government and the Federal Reserve will be there backstop the risk and socialize the losses.

It now is time to consider imposing a Standard Oil/AT&T solution to the FIRE economy (Finance, Insurance and Real Estate), and break up the financial giants.

Standard Oil was broken up in 1911. AT&T was dismantled in 1984. The republic, and commerce, survived both episodes, despite plenty of wailing and gnashing of teeth. The same can be and should be accomplished with the financial TBTFs.

Not today, or this month or possibly before the first term of the next president is complete, but soon, as the FIRE economy clearly is in a systemic turmoil created by the unfettered growth of individual financial institutions and the blurred regulatory lines which led to a generation of combining once-separated business lines.

To summarize: (i) Reimpose regulation to again separate - completely - banks, brokerage firms, investment banks and insurance companies; (ii) Regionalize the maximum geographical footprint of financial firms, and (iii) Prohibit bank, brokerage, investment bank and insurance company ownership interests in non-related financial entities.

The planning for an orderly dismantling - a regionalization - of the nation's financial system, however, should begin as soon as possible, and easily could be based upon the Federal Reserve's existing 12 geographic districts.

With the Federal Reserve poised to take on the role of financial super-regulator, with broad authority over banks, brokerages, investment banks, insurance companies and real-estate-related companies, a plan to limit the geographic reach of financial institutions to the regional footprint of their Fed districts not only is feasible, it's crucial.

Of course it would be challenging, but in no way impossible, to break up Citigroup and JP Morgan and Bank of America and other TBTFs, but how could it be any more difficult and expensive than watching these institutions implode, explode and re-combine as we are witnessing this year, yet resulting in bigger, riskier institutions likely to err again in the future?

The republic indeed would survive, and, in fact, be better off without the Damoclesian sword of systemic risk hovering above our heads.

In the absence of major FIRE economy reform, we forever will be held hostage to the moral hazard and systemic risk of financial institutions on the brink of failure, and forever requiring knee-jerk public, socialized bailout solutions. It is time to put out the FIRE economy before it burns us to the ground.