Why Banks Should Be Big

(MoneyWatch) 
The first thing you ought to do when you fall off a horse, goes ancient wisdom, is get back on one and ride again. Nowhere is that piece of advice more relevant right now than in the financial services sector of the economy.

A recent article in The New Yorker points out that in 2008, for the first time in sixteen years the finance and insurance sector contracted. The article continues:

For many, this comes as a welcome development: the size of the banking industry has become a symbol of the much lamented "financialization" of the U.S. economy over the past thirty years ...

The desire to bring back the boring, small banking industry of the nineteen-fifties is understandable. Unfortunately, the only way to do that would be to bring back the economy of the fifties, too. Banking was boring then because the economy was boring.

Indeed, there have been all sorts of ruminations lately -- not least from the government -- about what banks should and should not be allowed to do. At the front of that has been the debate about how much in bonuses financial firms should be allowed to pay out to key employees -- especially since they opted to part-nationalize themselves. Loose regulation of hedge funds is being clamped down on. And shareholders of big banks are baying for the blood of top management.

Another topic gaining widespread sympathy is the suggestion that the U.S. revert to the gold standard, where gold, as opposed to the dollar, is adopted as the country's primary reserve currency.

Such arguments garner additional appeal in light of facts such as U.S. loans and securities losses totaling $2.7 trillion, or double the estimated losses of six months ago. As the Federal Reserve continues to print money at an alarming rate, argue others, inflation will destroy any chance of a recovery if another round of clumsy risk management doesn't get there first.

It's been a tough time for the economy, and most of all for the financial institutions many thought were the bedrock of American commerce. But that doesn't mean the best approach is to revert to antiquated business structures which will only decrease U.S. competitiveness on the global stage. Part of the reason that emerging market countries have managed to weather the storm so well is because of their astonishing growth rates.

If the dominant strategy right now is one of reverting back to state-ownership of limited-sized financial firms, a finite resource representing the economy's reserve currency, and more regulation, Americans will just be standing on the sidelines of the next global economic boom.

The U.S. economy is a big landscape, and it needs big financial institutions with the bucks to finance big projects if it's going to improve. That means leaving some uncomfortable memories behind and getting back on with what America is best at: being big.