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Simon Johnson writing in Bloomberg…

~~~”… Still, we should treat the next few weeks as the public-comment phase for potentially serious principles and an opportunity to press for workable details.

The big banks, naturally, are already hard at work pushing in the other direction. This is actually good and exactly what we need. The banks have hidden behind their lobbyists and disinformation managers for too long.

The administration has decided to take the fight to them, face-to-face, with the full backing of a president at last willing to press for change. The goal should be to flush both the big bankers and their Republican – and Democratic – backers into the open.

There are sensible people on both sides of the political aisle on this issue. But there is also Senator Richard Shelby of Alabama, the ranking minority member of the Senate banking committee, who has been arguing that the morass of massive financial institutions can be handled through minor modifications of our bankruptcy code.

This is as nonsensical, and as unconnected to reality, as the view – also current among some pro-banking constituencies – that the US can just become more like Canada, in the mythical sense of having four big banks that are well regulated. Please, just spend some time with people who know the facts and review in detail the breakdown of risk management at Canada’s greatest financial institutions.

President Obama finally has economic logic and solid history on his side. If he comes out clear and strong on this issue in his State of the Union address on January 27 and in all the ensuing congressional discussions, he will flush out into the open the self-serving greed and frank stupidity that underpins the idea that bigger finance is good, unregulated big finance is better, and today’s mammoth unfettered global banks are best.

This could turn out to be a huge policy change with important and positive ramifications around the world. But it is not for the faint of heart or weak of mind.

The serious debate with big finance is just beginning; it will get very nasty, hundreds of millions of dollars will be spent, and everyone, in the end, must take a side.

What we need is for sensible legislation to come to the floor of the Senate and for all senators to go on the record, in detail.

A public debate of historic proportions – the kind that shaped this republic – will set up the Democrats for the mid-term elections. If you would like to run on a pro-too-big-to- fail platform, go ahead.

As we drill down into the details of ideas for breaking the economic and political power of oversized banks, we need this litmus test against which serious suggestions should be judged: Does a proposal, at the end of the day, imply that Goldman Sachs should break itself up into at least four or five independent pieces, with the biggest being no more than 1 per cent of gross domestic product, or roughly $US150 billion?

If the answer is yes, we are making progress in moving our financial system back towards where it was in the early 1990s, when it worked fine (and Goldman was a world-class investment bank) and was much less threatening to the global economy. If the answer is no, we are merely repainting – ever so gently – the deckchairs on the Titanic.

Simon Johnson, a professor at MIT’s Sloan School of Management and former chief economist of the International Monetary Fund, is co-author of “13 Bankers” to be published in April 2010. The opinions expressed are his own.