The Financial World BY KEVIN MOE SPRING 14 CAR2L0SON SCHOOL GOEFM ENT MANA9 The weakening of the world economy is a well-told story—it even revived an old saying into a new catchphrase, “Too big to fail.” But snappy saying or no, things did collapse. “After the dust settled, we were left with a much more concentrated banking system,” says Carlson School Professor and Minnesota Chair in Banking and Finance Andrew Winton. “Several large banks and investment banks all but failed and were taken over by other large banks.” Bank of America acquired Countrywide and Merrill Lynch. J.P. Morgan Chase acquired Bear Stearns and Washington Mutual. Wells Fargo acquired Wachovia. “This is ironic, since many believe that a key cause of the crisis was the ‘too big to fail’ problem, in which investors believed the U.S. government would bail out large financial institutions rather than let them fail and cause massive damage to the financial system. Making the big banks even bigger increases the potential impact of their failure,” he says. To reduce the likelihood of such bailouts, the Dodd-Frank Wall Street Reform and Consumer Protection Act were signed into law in 2010. Now, large banks and other “systemically important” financial institutions need plans for how to carefully wind themselves down in the event of failure, so bailouts are not needed. And the act’s Volcker Rule forbids banks with insured deposits from engaging in proprietary trading—taking risks in the securities markets for their own account. As Dodd-Frank gives a major role to government oversight, it has received much criticism for its interventionism, much like a Keynesian view of monetary policy. Keynesians typically believe that during a recession, government should lower interest rates and spend to lessen its length and severity. “Personally, I feel government has an important role to play to minimize economic downturns,” says Professor Robert Goldstein, the C. Arthur Williams, Jr./Minnesota Insurance Industry Chair. “However, I do not believe that monetary policy should play the dominant role. Rather, I feel the Fed should have only a single mandate—maintaining low and steady inflation.” Goldstein says fiscal policy should play the dominant role in reviving the economy. “I feel that labor income should be subsidized during recessions,” he says. “That is, government should effectively pay a portion of wages, making it cheaper for firms to keep their employees rather than firing them—in turn reducing adjustment costs associated with changes in employment.” Visit carlsonschoolmagazine.com for video.
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