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Big Banks: Benefit or Drag?
Large banks deemed too big to fail have received a lot of the blame for the problems facing the global economy. Are large banks harming society?
RAJAN: Clearly large banks have had an advantage. If they are too big to fail or too complicated to fail, the answer is not necessarily to break them down. If you do that, you may replace too big to fail with too many to fail. For example, during the Great Depression in the U.S., we saw so many small banks falling like flies. We need to find ways to revive the [banks we have]. So the immediate answer is not to shut down the large banks and create a lot of smaller banks. It is to make larger banks better managed and have larger banks carry better purpose. And we need to make it easier on the system to let bigger banks fail so that they don't enjoy this premium. When there's no chance of that entity being destroyed, it prevents entry, it prevents competition, and that ultimately is the course of the demise of capitalism.
MOYNIHAN: The role of banks is to transmit to society what already goes on. We reflect the economies of whatever country your bank is in. And so when capital markets are going strong, we see capital-markets activity up. So we reflect the economy. The full power we have, the size we have, comes from the size of economies. We also reflect the excesses. And so as economic excesses build up, the banking services to the U.S. and around the world reflect it. The regulations and rules that societies have developed around the world have changed that, from Basel III to Dodd-Frank. When there are excesses, we'll have boom-and-bust cycles. Our job is to continue to learn from that and correct it. But at times, innovation gets ahead and makes [correcting] harder to do.
BURROW: Too big to fail is about socializing your losses, not about sustainability or serving the real economy. Being that big works against good governance and competition. It works against getting credit to small to medium-size businesses. Too-big-to-fail banks are the biggest bullies on the planet, because when governance at these banks fails, they demand bailouts from governments. And governments don't have any choice but to bail them out with taxpayers' money. In many countries, the stimulus that was meant to address the economic crisis went to bail out banks. And yet now we've got bigger crises in unemployment and greater impoverishment.
To innovate or regulate?
What is the solution to the current economic crisis? Increased government regulation? Or freer markets?
RUBENSTEIN: Everybody thinks they're over-regulated. I've never met anybody who says, "Please regulate me more. I need your help." And nobody ever says, "Tax me more," with the possible exception of Warren Buffett. But my concern isn't as much about the idea of being regulated as it is about the uncertainty created by passing new regulations. Whenever there is an economic problem for example, in the cases of Enron and this recession what we do afterward is regulate and pass legislation. The specifics on the Volcker Rule, perhaps the biggest piece of Dodd-Frank, haven't been finalized yet. And that means the business community doesn't know what the rules are we're supposed to live by. We don't mind regulations in the business world. But tell us what they are in a reasonable period of time and in a simple way, so that we can actually operate under what the government wants us to do.
VERWAAYEN: We are in an age of transformation. We are more connected as a world than we ever have been. What happens in one part of the world has an immediate impact on the other. And we are in a 24/7 information drill. Whatever happens here has an impact immediately around the world. There are no safety barriers, and there is no time to react. There's no time to think. Meanwhile, technology is creating new jobs that are very different from the old jobs, and maybe in very different places in the world. And yet governments are still organized as they were in 1912. Institutions are still organized as they were in 1950. And companies are operating the way they did in 2011. So we have to move forward on each of those layers.
BURROW: We do need transformation, but the question is, What set of values should capitalism serve? Cohesion, growth, greater equity? Those are the questions we should be asking.
RAJAN: Governments made a ton of promises in the '60s when growth was very high. You know, we had the welfare state across the industrial world. And then growth started falling off in the '70s, in the '80s. Some countries the U.K. and the U.S. tried to revive it through deregulation and managed for a while. But the real issue is our growth is too slow in the industrial world relative to the promises we have made. Therefore, just saying that the government should go out and spend and create new jobs is not the answer. We have to revitalize growth. That is the long-term answer.