Monday, May 10, 2010

Roubini: Break Up the Banks; Prevent Them From Short Term Borrowing, Pop The Bubbles

Nouriel Roubini has an article on Newsweek this week, with co-writer Stephen Mihn. Some of his points:

  • Many of Obama's reform proposals are good, but they don't go far enough.
  • More drastic changes can and should be imposed, including breaking up big banks and imposing new firewalls.
  • Use monetary policy to prevent speculative bubbles.
  • The recent crisis highlighted the "too big to fail" problem: many institutions had become too large, leveraged, and interconnected; their collapse could have systemic and catastrophic effects
  • Those banks are not only too big to fail, they're too big to exist, and too complex to be managed properly. They should be pushed to break themselves up.
  • Reinstating Glass-Steagall would be good but not good enough. What is needed is a 21st-century version of the legislation that creates new firewalls.
  • Investment banks and broker dealers should be banned from doing any kind of short-term borrowing.

Commenting on the banks' claim that the global economy today can't function without them, he says that this is preposterous: "the financial-supermarket model has been a failure". he cites Citi as a prime example of unmanageable;e company selling thousands of products and services.

He adds that even "healthy" firms like GS are threat. "Not that you would know it listening to the firm's CEO, Lloyd Blankfein, who in early 2010 defended handing out record bonuses by claiming, 'We're very important. We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. We have a social purpose'.

To this Roubini says: "Spare us."


On bubbles, he says: "Apologists for the status quo argue that central banks can't intervene against rising asset prices because of 'uncertainty.' This is nonsense: uncertainty doesn't stop central bankers from targeting inflation; it shouldn't stop them from countering bubbles, either".

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