Tyler Cowen offers a provocative answer — rather than break up the banks, let’s balance the budget.

If you do wish to break or limit the power of the major banks, running a balanced budget is probably the most important step we could take. It would mean that our government no longer needs to worry so much about financing its activities. Of course such an outcome is distant these days, mostly because American voters love both high government spending and relatively low taxes.

Embedded in this simple idea is a radically different way of looking at the relationship between the federal government and the major financial institutions, one that fits the facts as I understand them.

There’s a different way to think about the bailouts, namely that the U.S. government stands at the center of a giant nexus of money raising, most of all to finance the U.S. government budget deficit and keep the whole show up and running. The perception at least is that our country requires the dollar as a reserve currency, requires New York City as a major banking center with major banks, and requires fully credible governmental guarantees behind every Treasury auction and requires liquid financial markets more generally. Furthermore the international trade presence of the United States (supposedly) requires the federal government to strongly ally with major commercial interests, just as our government sides with Hollywood in trade and intellectual property disputes. To abandon banks is to send a broader message that we are in commercial and political decline and disarray, and that is hardly an acceptable way to proceed, at least not according to the standards of the real Washington consensus.

The erosion of the economic dominance of the United States has meant that we are more and more like a normal country, with all of the constraints on our freedom of action that entails. The perception of what we must do will eventually adjust to the new economic realities. But that will take time.