The telephone system worked pretty well before deregulation. A slightly less drastic solution might have kicked the company into allowing us to own our own phones. Power utility deregulation was mostly good at pulling money from our collective pockets to line those at Enron. The financial industry under Glass-Steagel, the depression era law that separated financial companies by function, was less exciting but worked just fine.
Building walls between powerful entities is less efficient overall, but it does provide natural checks and balances. The result is an imperfect balance, as we see in our constitutional government, but it limits the harm the government can do as well. Re-creating distinctions between different types of financial institutions is more likely to succeed than expecting a supreme regulator to police huge, complex institutions.
The correct solution to entities which become so large that they pose a danger to society: limit their size and scope. The Federal Reserve Bank is divided regionally. It's seperate from the FDIC. We could all do with a little less financial excitement in our lives. The prospect of B of A being broken up into competing and complementary institutions does not frighten me. Teetering CitiBank frightens me. AIG, where the right hand knows not what the left hand is promising, frightens me. Get over it, Robert Rubin was wrong here.
Less efficient? You bet and praise God. What an engine of job creation, reversing the mergers and acquisitions that left hundreds of thousands of employees on the street. Huge financial institutions, like centrally planned economies, are impossible to manage. No one can be aware of enough facts to make the right decisions and limit the risk the institution faces. If mark-to-market comissions are the way people get paid, they will forever give away the future for millions in hand right now.
