1) I'll let the academics determine "how high is too high" but I'm of the view that the financial system shouldn't be a source of economic growth in its own right. Returns should be low. Because risks should be low. I think it is a very bad thing, and a tremendous miss-allocation of resources that our rocket scientists are building crazy financial products instead of discovering and building the next generation of real stuff. I don't want our banks to be exciting. I want them to be stable, and boring. I don't want our geniuses going into finance because they can make billions. I want them making billions by building companies that actually do something other than moving paper from one place to another.
2) Our financial system has progressed to the point where deposit taking institutions no longer control the flow of credit. It used to be enough to regulate the "money center banks" but an entire "shadow" banking system has developed that is mostly outside of the regulatory oversight that served us well for sixty years (1930-1990). The "shadow" banking system needs to operate under the same rules as the ordinary banking system.
3) The problem being addressed here is underwriting standards. In the olden days lenders performed due diligence on the loans they extended because they were on the hook if things went sour. Now lenders can hedge their credit exposure with securitization or credit default swaps. Lenders shouldn't be allowed to lend money and then completely insulate themselves from the risk they created.
5) Bigger is not necessarily better. I can get bigger just by merging a bunch of stuff together (see Citigroup under Sandy Weill). It doesn't have to even work that well (see Citigroup under Sandy Weill). But at some point, your size becomes a problem for everyone else in the industry because everyone has massive amounts of credit exposure to you. I agree that arbitrarily breaking up companies is bad, but unless we impose some other pretty onerous restrictions, it will be necessary.
7) I agree it would be hard to get people to serve under these circumstances unless the financial institutions were super safe, which is precisely the point (see #1 above).
1) That is fair enough... so we both are OK with this.. and I think most people do. However, I do not care if they make some good money... as long as they follow the rules and regs... if they want to be a bank, be a bank and if you want to be something else... be something else... but don't be a bank and then say 'we also want to be something else'....
2) Yes, the shadow banking system has been growing since the 1980s.. at least that is when I started working at a bank and was seeing them.. the problem I have is that your definition would include almost any kind of lending... payday loan, car title loans, pawn shops, etc. etc. you can get money at a lot of places that I do not care if they are regulated or not LIKE A BANK... sure, have some minor regs on fees and truth in lending etc., but calling them a 'financial institution' is bad IMO. Also, if one of them goes under there is not as big of financial hurt... Look at CIT (if I am remembering the firm correctly)... a ho-hum... Usually the 'masses' do not have money in these people unless they invested in stock or bonds and know the risk. Someone who opens a checking account wants to make sure their money is there when they need it... without an major undue risk. A 'bank' is that institution and a bank takes deposits.
Interesting is what about MM accounts at FIDO, Vanguard etc... they are not 'banks'.... but take in deposits... hmmmm....
3) Again, there is a lot of commerce that goes on that are 'loans' that making the person who initiated it keep 'part' just does not work well. As I mentioned before, if you sign a contract for a 3 year gym memebership, they turn around and sell that to a funding trust within the week (I was a trustee on one of these)... the investors had a criteria for what they would accept and what they would not accept (underwriting)... if the originating place did not follow that underwriting, the trust did not buy it... if they did, then they got their money and the trust was not on the hook. I am not mentioning the discount that was involved in the transaction... that is the price, not the underwriting... This happens in car dealerships, furniture stores etc. etc. Almost any big ticket item is being financed by someone else that is not the company you are buying from... and trying to make that firm become a 'lending institution' is not smart...
Now, if you are talking about the banks that package CC debt, student loans, car loans, etc. etc... just to get them off their balance sheet... then I can agree that they should have a residual bond. Most of the ones that I was trustee on did.... but it was a very small percent... so maybe that percent should be bigger. But the bank was 'selling' their risk... the buyer should have been smart enought NOT to buy bad loans...
5) I did not say bigger is better... I just said having an arbitrary level where you can not get above is not good. And truth be told, there IS a maximum... IIRC, no bank can have more than 10% of the deposits. I do not know how low a level that goes down (federal, state, city
)... but if you think how much that is.. it did not stop Citi, Chase, BofA etc.. who are now multi-trillion dollar banks..
7) Still, if they were on the hook... even if super safe... it is something most smart rich people would avoid... If I were rich... I would... not enough reward for the risk....