Banks, too big for our own good?

If there’s one big issue that arises continuously and vexatiously in American history that issue, I submit, is not race but banks. To be sure, the Republican Party owes its formation to slavery, which the Party’s first president abolished. But the formation of two bitterly opposed parties — Democrat and Whig (predecessor to Republican) — had nothing really to do with race, and plenty to do with banks.

In any event, the issue of banks remains front-and-center today. For example, Erick Erickson at Red State has urged the Romney campaign to adopt a break-up-the-banks message. And he calls breaking up the banks “a conservative imperative.”

I’m with Paul Rahe on the merits of breaking up the banks– strongly inclined to agree with Erick, and with the Wall Street Journal, Jon Huntsman, and other conservative heavyweights, but lacking sufficient expertise to be certain.

With that disclaimer made, it seems to me that capital requirements should be significantly higher for any financial firm whose failure can cause broad damage. Such requirements would pressure banks to break up. The advantages to society would be less risk of broad damage and less risk of regulatory capture by the banking industry, i.e., less crony capitalism.

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