WASHINGTON, DC – The world economy faces a major problem: the largest banks in the United States remain “too big to fail,” meaning that if one or more of them were in serious trouble, they would be saved by government action – because the consequences of inaction are just too scary.
This problem is widely acknowledged, not just by officials but by bankers themselves. In fact, there is near unanimity that fixing it is a top policy priority. Even Jamie Dimon, the powerful head of the very large JP Morgan Chase, emphasizes that “too big to fail” must end.
Unfortunately, the Obama administration’s proposed approach to ending “too big to fail” – now taken up by the US Congress – will not work.
The current center of legislative attention is Senator Christopher Dodd’s financial reform bill, which has passed out of the Senate Banking Committee and will presumably soon be debated on the Senate floor. Dodd’s bill would create a “resolution authority,” meaning a government agency with the legal power to take over and close down failing financial institutions.