Eliot Spitzer, who has become one of the most perspicacious commentators on the current financial crisis ( I don’t see why cavorting with whores should be a prima facie reason for not considering him for the SEC, when Obama has the chance to name commissioners) had a very interesting article in Slate this past week. He wrote a theme that has popped up in a few places over the last several months—too big to fail is too big to exist, and we should create a network of smaller and stabler banks, and seoarate out these gargantuan monstrosities that create moral hazard by their very interrconenctedness with other gargantuan financial monstrosities. Giants walk the earth, and their biggest threat is that they will die, jack in the beanstalk-like, and fall on us, so they demand to get propped up by us dwarves.
This is an issue that is close to my heart. When I imagine my ideal state, it always comes down to one of two options. Either a universal superstate, sort of like Star Trek’s United Federation of Planets, with one world government supervising everything and everybody, or a world that is inhabited by myriad self-supporting communes and cooperatives, each independent though loosely linked together, without any sovereign countries, but with perfect freedom and amity existing among the world’s communities. The socialist and the anarchist vie in my breast, and I guess I don’t really care which side wins.
In less utopian ways, the contest between the beneficent powers of bigness and smallness have long vied in American reform politics, from the bigness of Teddy Roosevelt and Herbert Croly’s New Nationalism, to the smallness of Wilson’s and Louis Brandeis’s New Freedom, to a variety of New Deal programs, with the NRA and TVA on one side, and Thurman Arnold’s TNEC on the other. The SEC and the Fed was under Roosevelt were advocates of the usefulness of smallness, breaking things apart, rather than putting them together, separating commercial and investment banking, enforcing rules against promiscuous branch banking and interstate banking holding corporations, breaking up the huge utility holding companies. Over the past thirty years, the trend has been to put things together again, with huge daisy chains of international corporations of bewildering complexity.
Over the last few months we have made some useful moves towards bigness (quasi-quasi nationalizing the already quasi-national Fannie Mae and Freddy Mac), but have otherwise kept the financial structure more or less intact, and those who run it would be very happy to keep the status quo around, now kept alive by massive financial subventions.
Probably in times of financial crisis, as happened during the New Deal, strong governments irresistibly move toward both bigness and smallness, nationalizing or taking over some things, and breaking apart others into more manageable constituent parts. I completely agree with Spitzer, we should use this crisis, as we take over failed financial institutions, to use a strong central government and regulatory apparatus, as we did in the 1930s, to rediscover the benefits of financial smallness, while working with other nations to build a super-SEC of international scope and powers, of the sort that the United Federation of Planets would be proud of. In any event, the worst of all possible worlds, and one that is unfortunately more likely than not, is that in the end, we will end up with a marginally chastened version of the current financial status quo.