That
is the issue is it not? The US government has had a full century of
effective experience in the art of breaking up large risky
corporations as any sane government must. Instead we actually got a
consolidation instead. Quit bluntly all the too large to fail banks
should have been instantly nationalized and sold of piecemeal with
financing to the myriad smaller domestic banks.
The
lesson would never have been forgotten because all the perps would
have lost all their capital.
Instead
we have the present nonsense in which recovery is achieved by
embarking on the same road. Since recovery is now underway after its
four year gap, it will take about seven to eight years before we have
another nasty round. This will take us to 2020.
Unless
of course the next president is economically savvy and pushes through
the reforms needed to protect everyone. The current one has lost us
four years out of the lives of ten percent of the work force. The
recovery we have now is happening naturally because all the problems
were squeezed out of the system and consumer lending is now
expanding.
There
are plenty of flaws in the financial system, but most are not crisis
producing and never will be. This flaw is and will be unless it is
forcibly broken up without going through a real bankruptcy.
Think
of something, the biggest player can lay of the risk of a gamed bet
or derivative onto the shoulders of his close competitors and trip a
situation in which he holds all the marbles and why will he not do
so? We have a situation in which everyone is a potential rogue
trader.
If the Fed Knows
Banks Are Too Big, Why Doesn’t It Make Them Smaller?
Thursday, 16 May 2013
09:53By James Kwak,
On May 2, The
Wall Street Journal reported that regulators were pushing to
require “very large banks to hold higher levels of capital,”
including minimum levels of unsecured long-term debt, as part of an
effort “to force banks to shrink voluntarily by making it expensive
and onerous to be big and complex.”
The article quoted Fed
Governor Jeremy Stein, who said, “If after some time it hasnot
delivered much of a change in the size and complexity of the largest
of banks, one might conclude that the implicit tax was too small, and
should be ratcheted up” (emphasis added).
A few days later, Fed
Governor Daniel Tarullo said roughly the same thing (emphasis
added):
“‘The important
question is not whether capital requirements for large banking firms
need to be stronger than those included in Basel III and the
agreement on capital surcharges, but how to make them so,’ said Mr.
Tarullo, adding later that even with those measures in place it
‘would leave more too-big-to-fail risk than I think is
prudent.‘”
Tarullo recommended
higher capital requirements and long-term debt requirements for
systemically risky financial institutions.
Last week, Governor of
Governors Ben Bernanke quoted from the same talking points
(emphasis added):
“Mr. Bernanke said
the Fed could push banks to maintain a higher leverage ratio, hold
certain types of debt favored by regulators, or other steps to give
the largest firms a ‘strong incentive to reduce their size,
complexity, interconnectedness.’
“The Fed chairman
acknowledged growing concerns that some financial companies
remain so big and complex the government would have to step in to
prevent their collapseand said more needs to be done to eliminate
that risk.”
It’s important to
note exactly what Stein, Tarullo, and Bernanke are all saying.
- Here’s what they’re not saying: Too-big-to-fail banks enjoy implicit subsidies and impose externalities on the rest of us; therefore those subsidies and externalities should be priced; and then those banks can decide whether they want to absorb those costs or make themselves smaller.Here’s what they are saying: Too-big-to-fail banks are too big and complex and pose a systemic risk to all of us; therefore they need to become smaller and less complex; and the Fed will tweak the regulations until they become smaller and less complex.
What’s remarkable
about this? These three men—probably the three most important on
the Board of Governors when it comes to systemic risk regulation (as
opposed to monetary policy, for example)—all say that
they know that the megabanks are too big and complex. They
all say that accurate pricing of subsidies and externalities
is not an end in itself.* They all say that the goal is
smaller, less complex banks.
But here’s what
baffles me: If the goal is smaller, less complex banks, why not just
mandate smaller, less complex banks? Why beat around the bush with
capital requirements and minimum long-term debt levels? Those tools
might be appropriate if you think huge, complex banks should exist
but you want to make them safer. But if you’ve already concluded
that banks need to be smaller and less complex, then they’re just a
waste of time.
They also betray a
frightening naivete regarding corporate governance. The theory is
that higher capital requirements, for example, will lower banks’
profits, which will upset shareholders, who will eventually force the
board of directors to eventually convince the CEO to break up his
empire. This scenario, unfortunately, depends on the premise that
American corporations are run for the benefit of their shareholders,
which is only roughly true, and even that often requires long,
expensive, and messy shareholder activist campaigns.
Instead, there’s an
obvious solution: rules that limit the size and scope of financial
institutions. But Bernanke has ruled out “arbitrary” size caps in
favor of his cute regulatory dial-tweaking.
Again, Bernanke’s
position might be defensible if he wasn’t already sure that
today’s banks are too big and complex. Then it might make sense to
tweak the incentives and see how the market reacts. But if he knows
they are too big and complex, he should eliminate that risk in the
simplest, most direct way possible. If he’s not sure how much
smaller and simpler banks need to be, he can do it in steps: set one
set of size and scope limits, see what he thinks about the outcome,
and then set another set of limits if he’s still unhappy.
To use a crude
analogy, let’s say we’re concerned about guns on airplanes. Ben
Bernanke thinks, like I do, that guns on planes present an
unacceptable risk to the safety of air travel. But his approach is to
charge a $100 fee for anyone who wants to bring a gun onto a plane.
If people keep bringing guns on board, he’ll raise the fee to $200,
then $300, and so on until people stop. The sensible, obvious
solution is to just ban guns on planes. But that would be
“arbitrary.”
* It is theoretically
plausible that one should simply price the subsidies and
externalities and then let the market determine whether big banks
provide enough societal benefit to offset the costs they impose on
the rest of us. But that is not what Stein, Tarullo, and Bernanke are
saying.
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