24/7 Wall St.

Former Fed chief Paul Volker has argued that America’s largest banks should be broken up to prevent a situation in which another credit crisis would force the government to spend hundreds of billion of dollars to rescue them.  Almost no one in the Administration or Congress is listening to him.

The New York Times reports that “The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies.” The counter of Mr. Volker’s argument, which is carrying weight with the powers that be, is that the government can regulate banks enough to keep them from taking imprudent risks.

Volker’s view of the world got substantial support today from the head of The Bank of England. BOE Governor Mervyn King said in a speech, “The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history.” His solution is to break financial firms into pieces. One set of institutions could take risks and would be unlikely to receive any government support in the event of a credit crisis. The other institutions would take and hold deposits from people and businesses.

While Volker’s and King’s recommendations will fall on deaf ears, they will be remembered very clearly if there is another credit crisis and the world’s major governments have to get back into the financial firm bailout business.

Douglas A. McIntyre