Saying We Need Big Banks Isn't the Same Thing as Defending Citigroup

In the responses to my post on why we need market-makers with big balance sheets, one thing I’ve noticed is that a lot of people are completely unable to distinguish between the argument that we need big banks, and the argument that we need the big banks that exist today. I made the former argument, not the latter. I thought this distinction was obvious, but it was apparently lost on quite a few people, who immediately pointed out that Citigroup is a very big bank, and it’s been a disaster — as if the fact that Citi was a failure somehow proves that market-makers don’t need big balance sheets.

In my post, I noted that one of the benefits of having large market-makers is that it allows the use of mark-to-market accounting, which is an important check on management. Both Felix Salmon and Ken Houghton rushed to point out that Citi doesn’t mark all its assets to market. Uh, yes, and that proves what, exactly? Citi doesn’t mark all its assets to market because it’s not required to. But that’s an issue of accounting rules, and has absolutely nothing to do with the bank size issue.

One of the things I’ve been trying to do recently is spur people to get beyond this kind of superficial sound-bite analysis. Being able to distinguish between an argument for big banks and an argument for the Wall Street banks that happen to exist today is a prerequisite for getting beyond superficial sound-bite analysis. So when I read a post like Felix’s, I honestly despair. The number of clearly fallacious arguments he treats as establish fact is just staggering, and slightly depressing. It is, ironically, a good example of what Steven Pinker just coined the Igon Value Problem: “when a writer's education on a topic consists in interviewing an expert, he is apt to offer generalizations that are banal, obtuse or flat wrong.”

On the other hand, when I read a post like this from Steve Randy Waldman, I’m greatly enouraged.