Facing the loose equivalent of today’s banking behemoths, Theodore Roosevelt resolved to forge a “newer and more wholesome doctrine” to deal with “monopolistic combinations and conspiracies”. Woodrow Wilson proclaimed: “I am for big business, and I am against the trusts.” Today’s leaders, who also govern in a time of technological progress and social inequality, must learn from Roosevelt and Wilson. Modern banks are worse than the rail and oil conglomerates of yesteryear. They must be broken up.
It would be irresponsible to espouse such radicalism if an alternative might work. But the debate since the collapse of Lehman Brothers has left little hope of a more moderate path. The best minds in academia and government have grappled with the challenge of “too-big-to-fail”. They have advanced ideas that will help at the margin, but have fallen short of a solution.
The firestorm over Barclays and the Libor interest rate is only the latest evidence supporting this verdict. In Britain, the scandal has revived calls for a firewall between deposit-taking high street lenders, who ought to be cautious, and risk-hungry investment banks. But firewalls and other semi-separations tend to melt in a crisis. In 2007, institutions such as Citigroup and Bear Stearns held mortgage derivatives or hedge funds in supposedly segregated companies. But, to protect their reputations, they felt obliged to rescue those vehicles when they crashed.