Early American history is, in many ways, a history of fighting over banks. The Bank of England (and the mercantilism system it supported) were an underrated cause of the Revolutionary War. After independence, Jefferson and Madison unsuccessfully argued that a national bank — despite Hamilton’s protestations — was unconstitutional. A generation later, President Andrew Jackson would declare: “The Bank is trying to kill me, but I will kill it.”
In fighting The Second Bank of The United States of America, Jackson argued (among other things) that a national bank would concentrate the country’s finances in only one institution — and enable foreign banking interests to control the government (sound familiar?).
A few years later, William Jennings Bryan said, “the banks ought to get out of the Government business…”
But like peas and carrots, big government and big banking could not be separated. After the Great Depression, Franklin Roosevelt created the FDIC and heavily regulated the banking industry — a framework that stood for nearly 70 years.
And so, the big banks became an institutionalized part of the American way. And they ceased being something that was part of the political debate (sure, politicians talked about them in hearing rooms and at fundraisers — but nobody ran for president touting their bank reform plan — nobody voted for president because they disagreed with the incumbents position on … banks.)
This, of course, has ultimately led us to our current situation. Though not widely appreciated, the banking industry appears to be in serious trouble today. What’s happening in the U.S. isn’t nearly as bad as what is happening in Europe, of course — but there are still serious systemic problems: Just six banks control assets greater than 60 percent of America’s GDP. (For obvious reasons, if just one of these banks failed, it could have cataclysmic consequences.)
It is entirely possible our next President will be faced with the same choice President Bush was faced with in 2008; whether or not to bail out major financial institutions or allow the financial system to collapse. Yet this is an issue that has garnered little attention on the campaign trail.
Democrats, of course, have no solution; Dodd-Frank did nothing to end “too big to fail.” It, in fact, enshrined it in law. Meanwhile, most Republicans haven’t really thought it through. Mitt Romney, the front runner for the GOP nomination, has decried “too big to fail” — but has himself failed to present any solutions. Texas Governor Rick Perry has likewise talked about ending “Too Big to Fail,” but hasn’t offered specific solutions.
Texas Rep. Ron Paul has done much to shed light on the problem. But while he may win Iowa, few observers believe he has a real shot at winning the Republican nomination. What is more, Paul’s solution seems to be to wait until a bank fails, and then to allow them to do so. Even if you believe worries of a global calamity are overwrought, there must be a better way to prevent another bailout.
This leaves us with Governor Jon Huntsman, a Republican who has proposed a bold solution. He is, perhaps, the most mainstream Republican candidate who is taking this issue seriously.
Huntsman’s solution: Break up the big banks. (Actually, Huntsman adviser C. Boyden Gray tells me this would likely be done organically — by changing the rules, including requiring higher capital standards — or instituting a form of Glass-Steagall. In other words, Huntsman would set the regulations, and then, let the banks decide how to downsize.)
Some conservatives, no doubt, view this as an example of over-regulation. But Huntsman’s team strongly disagrees. “When it comes to safety and soundness,” said Gray, “I don’t think — because of the subsidy involved and the desire to try to get rid of it — I don’t think conservatives have a problem with it.”
“I think it’s quite consistent with Free Market, level playing-field opportunity,” added Gray.
To be sure, Huntsman’s not alone in believing something drastic must be done to both prevent bank failures and bailouts. “I think you should force them to break up,” says Prof. Simon Johnson, the Ronald A. Kurtz Professor of Entrepreneurship at MIT Sloan School of Management” when asked how to solve the problem. “And that’s exactly what Jon Huntsman is proposing,” he added.
Others have made similar arguments. Former Florida Governor Jeb Bush (whom many believe should have run, himself) has written about this idea — as well as former and current GOP Federal Reserve officials Kevin Warsh, Thomas Hoenig and Richard Fisher. As such Huntsman has proposed a dramatic financial reform plan and is campaign on it.
“Governor Huntsman understands…when you see massive, transparent, dangerous government subsidies, you should want to eliminate them,” says Johnson.
“Big banks have an incentive to take a lot of risks,” he added. “But when things go badly, who picks up the tab?”
Huntsman’s team believes the next president must campaign on reform — in order to build a governing coalition. Otherwise he or she won’t have the political capital to pass the kinds of fundamental reforms needed to prevent another bailout. “Winning an election isn’t an end in and of itself, as Romney seems to think it is,” said another top Huntsman adviser. “It’s the first stone crossing a river.”
