The End of 'Too Big to Fail'

"Too big to fail" must die. I am preparing legislation to empower federal regulators to rein in and dismantle financial firms that are so large, inter-connected, or risky that their collapse would put at risk the entire American economic system, even if those firms currently appear to be well-capitalized and healthy. Never again should American taxpayers have to bail out high-flying financiers when their risky bets go sour.

The economic meltdown we narrowly averted last year rightfully convinced the American people that we need to re-examine the fundamental structure of our financial system. Wall Street financiers, however, seem to think that -- now that they are basically stable thanks to American tax dollars that kept them afloat during the worst of the crisis -- they can just go back to business as usual. I have news for Wall Street: The world shifted, and it will never return to the way it was before mid-September, 2008.

Our only two living former chairmen of the Federal Reserve Board -- Paul Volcker and Alan Greenspan -- have both indicated they support making sure that our nation's largest financial institutions become smaller so that none would be too big to fail. Even John Reed, who helped engineer the merger that created Citigroup, now recognizes it was a mistake to create such a huge institution. "I would compartmentalize the industry for the same reason you compartmentalize ships," he recently told a Bloomberg reporter. "If you have a leak, the leak doesn't spread and sink the whole vessel."

Capitalism is the most vibrant, flexible, and efficient economic system mankind has yet devised, and it is essential that we limit governmental interference in the distribution of capital as much as possible. At the same time, however, we must forever bear in mind that the purpose of any economic system is to serve the needs of people through the efficient distribution of goods and services. In addition to being inherently risky to systemic collapse, unfettered capitalism can lead to the extreme concentration of resources in the hands of the wealthy few, which can ultimately lead to political instability. Look to the example of the French Revolution to understand how the hungry masses will destroy the institutions of civilization to survive.

I am not suggesting that the American people are anywhere close to a violent revolt, but they have an intuitive queasiness about having a very small number of very huge financial institutions control an enormous amount of this nation's capital. They are still furious about the trillions of tax dollars spent to prop up financial entities which seemingly do nothing to serve their needs; all they know about organizations like Citigroup is that they are charging them outrageous fees on their credit cards.

Americans are not the only ones who feel burned by giant financial firms relying on tax dollars to remain afloat. Our most important economic partner, the European Union, has begun pressuring its largest financial institutions to divest operations as a condition of receiving additional state aid. Approximately 80% of all securities traded in the world emanate from firms based in the U.S. and the EU; the United States and the European Union working in partnership can still wrest some level of control over multi-national financial behemoths before they become so huge and powerful that they forever escape control of any governmental entity. If we do not set reasonable standards for both sides of the Atlantic, the global economy will forever be at risk of future collapse that no government would have the power to prevent.

President Obama has proposed restricting the activities of our largest financial firms and establishing rules for the orderly dissolution of those entities should they begin to fail. I believe we need to go further by preventing institutions from becoming systemically risky in the first place. As we restructure our regulatory framework, I hope that we can find agreement on this goal and focus on the mechanism by which we reach it.

Congressman Paul E. Kanjorski serves as the Chairman of the U.S. House of Representatives Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. He represents the 11th Congressional District of Pennsylvania.