There's a line in Simon Johnson's Atlantic article that I rather liked. "Anything that is too big to fail is too big to exist," he writes. There will, without doubt, be difficulties in enforcing any sort of cap. And it's perfectly plausible that the resulting financial industry will be somewhat less efficient than the last financial industry. The skeptics are probably right about that. But it's not obvious that there's an alternative solution. The state generally has a monopoly on force and a monopoly on institutions whose failure would pose a survival-level threat to the society (the military, say, or the legal system). That ensures that those institutions are, on some level or another, accountable to the society itself. I'm not sure you can permit a situation in which there are institutions whose collapse could rend society but who are only accountable to shareholders. That gives them too much political power, creates too much potential threat, and leaves taxpayers exposed to unacceptable downside risk, as we're seeing now.I think that maybe $300 billion in assets would be a reasonable cap on bank size -- there's very little evidence that banks get any economies of scale beyond that in any case. If they want to be part of a global or even a national network that would be fine -- I'm sure such networks would spring up quite naturally, much as they have in the airline industry. After all, the United States managed to go 200 years without any nationwide banks, it's unclear why it desperately needs them now.At the same time, the cap on the balance sheet of broker-dealers should be smaller still: the more interconnected you are, the lower the cap, to the point at which companies like the CME, which are far too interconnected to fail no matter how small their balance sheet, should be barred from issuing any liabilities at all.
