Tim Geithner's Wrong Again: We Need A Breakup

Treasury Secretary Timothy Geithner on PBS late Thursday said that President Obama doesn't really want to break up the banks. But one of the authors of a report that looks at the impact of increased consolidation in the banking sector says that Geithner's resistance to breaking up the banks is wrong.

"I think we should be talking about downsizing the banks," says James Lardner, a senior policy analyst at Demos and the author, with Nomi Prins, of "Bigger Banks, Riskier Banks: Thge Post-Bailout Continuation of a Pre-Bailout Trend," which crisply chronicles how the banking sector has changed in the months since the Wall Street collapse and subsequent bailout.

The report concludes that "after trillions of dollars in taxpayer funds, cheap loans and other forms of direct and indirect support, the biggest banks are bigger and more complex than ever; and for all the talk of new-found caution and tougher regulation, their recent record reveals an undiminished commitment to the kind of risky practices that inflate short-term profits when they go right but hold the potential to decimate the economy when they go wrong."

Lardner said that the banks have built a business model that is too dependent on speculative trading rather than traditional Main Street lending. He adds that "we've allowed the banks to get so big on the assumption that they must be to compete globally, and no one pauses to ask, 'What do the American people get out of having these banks that can compete globally?'"

The benefits, Lardner says, are dubious when it is the smaller, more community-centered banking institutions that contribute the most to stimulating the Main Street economy.

The Demos report also raises questions about the ability of the Obama administration to achieve one of its main goals, which is to keep banking institutions from using their federally insured deposits to engage in speculative activities. Through a combination of perfectly legal accounting maneuvers and permissive bookkeeping standards allowed by the Financial Accounting Standards Board, "it has become all but impossible to get an accurate or consistent picture of what is the ‘real money’ that banks derive from commercial or consumer services, and what is their ‘play money’ used for trading purposes. The play money is the most variable part of their earnings, and therefore the most risky to the overall fnancial system, particularly since much of the capital was federally funded during the past year."

Lardner is encouraging activists to put real heat on Congress to ensure that the reforms Obama have proposed translate into tough legislation that actually shrinks too-big-to-fail banks and keeps their Wall Street casino activities from putting the entire economy at risk. "Our financial stability and prosperity depends on having a contained and responsible financial sector," he says.

Views expressed on this page are those of the authors and not necessarily those of Campaign for America's Future or Institute for America's Future