Economist Henry Kaufman warns that the U.S. financial system is on the precipice of socialism, but can pull back with a few judicious steps by policymakers.
Writing in The Wall Street Journal, Kaufman, president of Henry Kaufman & Co., formerly managing director of Salmon Brothers, advocates reform of the concept of “too big to fail” banks, immediately.
“Our financial system is at a crossroads,” writes Kaufman. “We can either succumb to the forces that are shifting markets toward greater government back-stopping and socialization. Or we can create a structure in which no institution is too big to fail, and a financial system that is supervised effectively by a modernized central bank.”
To reverse course and save the capitalistic banking system, the government should, by regulation, prohibit any financial institution from becoming too big to fail, he writes.
“This would require that regulators downsize large financial conglomerates,” writes Kaufman. “In this process, the prime targets for divestiture should be financial activities that pose risk to the stability of the deposit function as well as operations that pose conflicts of interest.”
Presently, an “overwhelming proportion” of America’s financial institutions are considered too big to fail, and monetary restraint falls heavily on those institutions that are not as mammoth, writes Kaufman. Pressure, thus, mounts on smaller institutions that serve local communities.
Consolidation in turn reduces credit-market competition, he adds.
The policy proposal is gaining some attention in Congress.
Independent Sen. Bernie Sanders, originally elected as a socialist, is promoting legislation that will break up the “too-big-to-fail banks” Bloomberg reports.
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