Even Larry Summers Admits Too Big to Fail is the Central Challenge

Virtually all independent financial experts are demanding that the too big to fail banks be broken up, including:

• Nobel prize-winning economist, Joseph Stiglitz

• Nobel prize-winning economist, Ed Prescott

• Former Secretary of Labor, Robert Reich

• Chairman of the Council of Economic Advisers under President George W. Bush, and Dean and professor of finance and economics at Columbia Business School, R. Glenn Hubbard

• Former IMF chief economist, and MIT professor, Simon Johnson

• Deputy Treasury Secretary, Neal S. Wolin

• The Congressional panel overseeing the bailout (and see this)

• The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz

• Economics professor and senior regulator during the S & L crisis, William K. Black

• Economics professor, Nouriel Roubini

• Economist, Marc Faber

• Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales

• Economics professor, Thomas F. Cooley

• Economist Dean Baker

• Economist Arnold Kling

And virtually all bank regulators say that we need to break up the too big to fails, including:

• Former chairman of the Federal Reserve, Alan Greenspan

• Former chairman of the Federal Reserve, Paul Volcker

• President of the Federal Reserve Bank of Kansas City, Thomas Hoenig (and see this)

• President of the Federal Reserve Bank of Dallas, Richard Fisher (and see this)

• President of the Federal Reserve Bank of St. Louis, Thomas Bullard

• The head of the FDIC, Sheila Bair

• The head of the Bank of England, Mervyn King

(And 5 former Secretaries of the Treasury agree with Volcker.)

Even the Bank of International Settlements - the "Central Banks' Central Bank" - has slammed too big to fail. As summarized by the Financial Times:

The report was particularly scathing in its assessment of governments’ attempts to clean up their banks. “The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery,” it said, adding that government interventions had ingrained the belief that some banks were too big or too interconnected to fail.

This was dangerous because it reinforced the risks of moral hazard which might lead to an even bigger financial crisis in future.

And many bankers are for breaking up the giants as well.

For example, the President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, is calling for the break up of the TBTFs.

As is former investment banker, Philip Augar.

Even the chief economic advisor to the White House - Larry Summers - admitted in January that we must end the too big to fails:

"Too big to fail is in many ways the central challenge here," he said. "Because when institutions are too big to fail, they gain a competitive advantage from the sense of government support. And so -- and that gives them an unfair competitive advantage.

"They are then able to take risks without market discipline, and when they take those risks, then they fail," he continued. "And if they're too big to fail, taxpayers are on the hook and the rest of the economy suffers, as we've seen."

Summers then said:

[Our approach] goes after too big to fail, not in one way but in multiple ways.

Summers talks a good game. But as Moody's and many others point out, the government is doing nothing of substance to rein in the too big to fails.