Thomas Hoenig, president of the Kansas City Federal Reserve, gave a great talk on "too big to fail" banks yesterday. Summed up, here's everything you need to know about the problem:

How can a single investment bank on Wall Street bring the world to the brink of financial collapse? How can a single insurance company require billions of dollars of public funds to stay solvent and yet continue to operate as a private institution? ... These are the questions for which I have found no satisfactory answers. That's because there are none.

Because there are no satisfactory answers to these questions, I suggest that the problem with ["too big to fail" banks] is they are fundamentally inconsistent with capitalism.

Nailed it. Since the passage of Dodd-Frank, there have really been two groups in the "too big to fail" debate. One says leave the banks alone -- they're allowed to get as big, interconnected, and profitable as they want. Another says break them up -- the only reason they're big (and alive) is because of intervention that, while perhaps necessary at the time to stave off collapse, shouldn't continue indefinitely. 

It might have made sense to give Bank of America (NYSE: BAC) billions of dollars to help swallow Merrill Lynch in 2008, lest Merrill's implosion sprayed acid on the rest of the financial system. But it doesn't make sense to keep the "too big to fail" combination intact permanently. So break them up. 

Same for the other "too big to fail" institutions: JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), and even Wells Fargo (NYSE: WFC).

The main argument against breaking up a private company is that it's spitting in capitalism's face. But as Hoenig points out, the size of these companies goes against capitalism to begin with. Last month, Moody's (NYSE: MCO) CEO Ray McDaniel noted that the implicit assumption that large banks will be bailed out in times of trouble gave banks higher credit ratings. Capitalism doesn't work at that point. Breaking these banks up might be the most pro-market approach available.

"The financial system has become far less competitive and far more volatile with the onset of systemically important institutions," Hoenig said. "Though large firms remain a critical part of our economic system in the United States, they should not become so dominant that they become unaccountable to our capitalistic system."

What do you think should happen? Sound off below.

Fool contributor Morgan Housel owns B of A preferred. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of JPMorgan Chase. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. The Fool owns shares of and has opened a short position on Bank of America. Motley Fool newsletter services have recommended buying shares of Moody's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.