Obama’s “9th Decision” and the future of Wall Street

Over at Economic Principals, David Warsh takes a look at what he believes may be the key decision of the Obama administration’s economic policy.  As Warsh points out, much attention has been given to eight major decisions made in the last two years, ranging from health insurance reform to stimulus.  But the most important decision may have been one that the administration didn’t make:  the decision to restructure the financial services industry:

Wall Street veteran Henry Kaufman made the case (registration required) the other day in the Financial Times. The Dodd-Frank Act did nothing about the extraordinary concentration of assets that had taken place, he noted. The ten biggest institutions share of assets grew from 10 percent in 1990 to well over 70 percent today. Future failures could only increase that concentration, just as they did last fall.  Where else to put the assets of a failed bank but in the hands of the other giants? Small banks will be squeezed further in the years ahead, competition will decrease, volatility and risk-taking will increase, wrote Kaufman, until in the end there will be no choice but to recreate a system with a large number of smaller institutions no longer deemed too-large-to-fail.

Worth a read.

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