Yesterday I agreed with Arnold Kling that breaking up the big banks would be the optimal, albeit unrealistic, way to prevent the "too big to fail" problem. Today Paul Krugman explains why that's probably wrong:
Breaking up big banks wouldn’t really solve our problems, because it’s perfectly possible to have a financial crisis that mainly takes the form of a run on smaller institutions. In fact, that’s precisely what happened in the 1930s, when most of the banks that collapsed were relatively small — small enough that the Federal Reserve believed that it was O.K. to let them fail. As it turned out, the Fed was dead wrong: the wave of small-bank failures was a catastrophe for the wider economy.
Admittedly, on the subject of financial reform, I'm at currently at the stage where I agree with whoever I listened to last. So I reserve the right to change my mind again.