Breaking up big banks would harm consumers

Breaking+up+big+banks+would+harm+consumers

Drew Finley

After the horrendous financial crisis of 2008 that ravaged our country’s economy and continues to affect tens of thousands of families today, Americans have begun to think twice about the reliability of the nation’s big banks.

One of the most outspoken critics of them is, of course, Mr. Bernie Sanders. He has repeatedly pronounced that “the business model of Wall Street is fraud,” and that we must break up the big banks so as not to prolong a culture of deception and corruption.

There aren’t many people who would seriously argue that the nation’s financial sector is completely fine exactly the way it is now — the crisis of 2008 certainly debunked that myth if there was not already enough evidence to dismiss it.

But while Mr. Sanders’ proposals might seem attractive on the surface, they are nothing more than a pithy bumper sticker for his waning campaign that is well on its way to a screeching halt.

One reason why breaking up the big banks might be a mistake is that the conventional wisdom about how the financial crisis came to pass is on the whole pretty inaccurate.

Most Americans understand that predatory lending caused the ultimate bursting of the housing bubble, but what many of them do not know is that the big banks did not actually take part in much of that lending.

As the renowned economist Paul Krugman writes, “Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial; the crisis itself was centered not on big banks but on “shadow banks” like Lehman Brothers that weren’t necessarily that big.”

Any student of policy recognizes that before we can even begin to move forward with reform, we must first dissect why it is that we failed in the first place, and it appears that such collective national understanding as of now does not exist.

Furthermore, while breaking up the big banks might seem like a tactic that would hit the financial elites the hardest, it might actually be the average American who would suffer the most.

As Aaron Klein, one of the key architects of the Dodd-Frank Act, has remarked, breaking up the big banks would inevitably lead to millions of Americans having to switch banks once the larger ones had to drop customers in order to conform to the size limits.

That might not seem like a significant issue, but Klein further notes that such a switch “would impose both a one-time transition cost on millions of account holders and many would also incur more in ongoing fees and expenses that result from having access to smaller ATM networks, fewer convenient locations and a lack of broader services.”

In this way, breaking up the big banks would actually do as much harm to the consumers themselves rather than the large banking institutions that some of them upbraid for their troubles.

Moreover, there is not even convincing evidence that Dodd-Frank has actually failed to address the problems of the financial crisis notwithstanding the fact that many breakup proponents take this conclusion as a given.

Similar to our misconception concerning the cause of the crisis, Klein points out that Dodd-Frank was not explicitly designed to punish the big banks, but instead sought to address “the same core problems that break-up plans aim to achieve: to eliminate bailouts, end too-big-to-fail, increase financial stability and encourage a financial services sector that is safe, secure and works for American businesses and consumers.”

It therefore stands to reason that anyone who seriously advocates for the dissolution of the big banks must provide a decisive case for why breaking them up would truly work better than the current measures in place.                   

Sanders’ largely unsubstantiated rhetoric is improper, but his concern for the American middle class certainly has its place. He is quite right to highlight the fact that too many families are being left behind, and his lambasting of Wall Street elites should not be ignored.

But directionless criticism combined with sweeping rhetoric that lacks any real substance won’t get us anywhere.

The financial sector undoubtedly must be reformed, but Sanders has not yet proved to the American people that he should be the one to do it.