The argument for breaking up megabanks, restructuring them, or capping their size is this: Bigness plus bailouts have created what British bank regulator Andrew Haldane calls a “self-perpetuating doom loop.” The industry is so large, concentrated, and complex that the failure of any institution could create financial instability and thus major players receive an implicit government guarantee of their debt (a guarantee reinforced by the banks’ extraordinary political influence). The incentive, then, is to become even bigger and more complicated, raising the risk of financial crisis and further taxpayer bailouts. …

The HPS study is, I find, too quick to dismiss a) the idea that the size of these institutions may partly reflect government subsidy rather the result of market forces, and b) the idea that a continued funding edge by big banks over small might stem from the TBTF safety net. HPS also places unmerited faith in regulators and the Dodd-Frank financial reform law to out think the bankers and stay one step ahead of bank innovation — especially given the political power of Wall Street and the government-lobbyist revolving door. …

The rest of the HPS argument concerns international competition. My short response: The US should lead the way in pushing for an international accord that would break up these mega-institutions into more manageable sizes, as Dallas Fed President Richard Fisher has suggested. But if the US has to go it alone, so be it. Does it matter if US multinationals get their funding from banks based in Manhattan or London? We don’t need to subsidize a jobs program at the US megabanks, especially one which may be siphoning our best and brightest to construct complex financial instruments or supersophisticated trading algorithms rather than breakthrough in genetics or nanotechnology or energy.