I supported giving money to the banks when the financial system was teetering on the cusp of disintegration. Most people still don't appreciate how devastating it would be to have our credit markets collapse. True, we lived without much in the way of credit decades ago: we also lived without running water, cars, telephones, education, and the years between age 47 and 77. (I'd already be dead if I'd lived no longer than the average life expectancy in 1900.)
But now the immediate threat of a depression - and perhaps even short term threat of recession - is beginning to fade. Leading indicators suggest a softening of the blow against the poor and our poor 401(k) accounts. It's now time for Obama to take his lead from Teddy Roosevelt and break up the banks.
Teddy Roosevelt remains one of my favorite presidents. Hes was unafraid of big business and one of his major acts was the break up of John Rockefeller's Standard Oil Company into about 30 smaller companies. (To give you some idea of the size of Standard Oil, just one of those 30 was Exxon - which recently set an all-time record for corporate profits. Imagine the size that Standard Oil's profits would have been last year.)
Obama ought to mimic Roosevelt and break up the "too big to fail" banks. The only thing we can afford less than propping up these huge banks is a collapse of credit markets, so the current banks have us hostage. If banks were smaller, we'd be able to let some fail without threatening the economy. (And yes you could insure depositors without insuring the banks themselves.)
If the failure of big banks didn't threaten the entire economy, we could take the advice of free market advocates and just let them fail. If the cost of propping up big banks didn't threaten the government's ability fund other initiatives (and make big banks even more comfortable with taking big risks), we could take the advice of Keynesians and prop them up with a sigh and a shake of the head. Given we can't let them fail and can't afford to fund them, it seems like the only real choice is to not let them exist.
As legacies go, this would do more for Obama than presiding over a depression or an era of government-owned banks.