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Still 'Too Big to Fail'

When the same contention shows up in both The New York Times and The Wall Street Journal within one day of each other, you know it must be a...

When the same contention shows up in both The New York Times and The Wall Street Journal within one day of each other, you know it must be a politically transcendental issue. It occurred earlier this week, and the contention is indeed serious: We must rid ourselves of too-big-to-fail banks. First up was Gretchen Morgenson’s column in the Times Sunday Business section. In it, she quotes at length from Kevin M. Warsh, a former Fed governor for five years who had a front-row seat for the credit crisis of 2007-2008. “Our failure to have a dynamic competitive banking system is a partial explanation for the [economic] weakness we are seeing,” she quotes Mr. Warsh as saying. The next day, an Op-Ed appeared in the Journal by Warren A. Stephens, who heads Stephens, Inc., a Little Rock, Arkansas, based financial-services firm. “Five institutions control 50% of the deposits in this country. They are definitely too big to fail,” Mr. Stephens wrote. “In a capitalist economy, there should be no such entity. We should promote competition and innovation in the financial industry, not protect an oligopoly.” Mr. Stephens and Mr. Warsh differ in how to fix what they believe is a situation that could lead to another financial crisis and taxpayer bailouts. Mr. Stephens would break up the big banks and force all to choose between commercial banking and investment banking. Mr. Warsh would not break up big banks, but would require them to disclose much more information than is required by Dodd-Frank so that investors could decide if management was taking too many risks. But that won’t work, Mr. Warsh concedes, if investors continue to think “that big and troubled banks will receive special government assistance,” Mr. Warsh said in a speech at the Stanford Law School. “By sanctioning some list of too-big-to-fail firms — and treating them different than the rest — policy makers are signaling to markets that the government is vested in their survival.” I don’t pretend to know enough to argue the details. But I do know that another financial crisis would damage, perhaps irreparably, the chances of boosting U.S. economic growth to 4% per annum. I hate the idea of capping the size of any company, but I hate more the possibility that ever again we would have to rescue too-big-to-fail banks that put our financial system in peril. This is one of those “tough choices” we must face, not duck.