Too big to fail is too big
Congress is debating health care these days, and that is good. With the work that's been put into convincing us that it's of critical importance to pass a bil this year, it would be a shame if the majority democrats couldn't, you know, pass one.
Generals McChrystal and Petraeus are pushing for more troops in Afghanstan, and troop withdrawals need to continue in Iraq at a measured pace. If Congress has a brain, it will take a moment to deal with this, but not too long, because they are busy.
In their busy, hectic schedule, however, they ought to remember what issue it was that got them the huge majorities they have, and that helped push their candidate to victory in the presidential race. In the words of the last Democrat to win the presidency, it's the economy, stupid. Specifically, we have a few banks deemed “too big to fail” that we have propped up, that we are hoping will be as kind to us, and decide that, collectively, the people of the United States are “too big to fail.” So far, it hasn't been happening.
The President did what he does best yesterday, and gave a speech to the financial industry leaders on Wall Street. Unfortunately, this speech seems to not have had the resonating power that his speech did last week, which raised the support for health care reform by several points. Perhaps it felt this way because I was not the intended audience, but to tell you the truth, I think I was.
I think the president is too smart to think that Wall Street is just going to roll over and play nice because they were asked to, or because congress might pass a law later this year (remember they are still fighting over a health care bill). Even if they manage it, and I'm guessing they want to wait until next year when the election is closer, it will be at least months and probably years after the bill is passed before the new rules enacted by congress take effect. So the President's challenge to reform themselves before Congress forces reform on them is a bit like telling me to hurry to the mailbox before my four-year-old gets there. Even if I wanted to do it, I don't have to start right away (a note to my wife: I don't really let him get the mail, this is for illustrative purposes only).
What I hope is that the President is trying to build the political capital to institute reforms through regulatory agencies in the executive branch, and not wait for Congress. This would have a much shorter wait time, a few weeks maybe, and the reforms he institutes could serve either as models for legislation or as examples of what not to do, depending on how well they work That way when Congress drags their feet until next spring, and is tempted to bow to Wall Street lobbyists, the President can accuse them of watering down his reform, and the lobbyists will have (hopefully) a harder time of it.
Regardless, now is the time to act. While Congress is working on health care reform, and the President is waiting for a bill to sign, he should be finding a way to make sure that we don't ever have to prop up a bunch of banks that are “too big to fail.”
Here's my idea, Mr. President. Break up the banks. If most of the bank failures have been smaller banks, it's only because you're holding the bigger banks up. They would have failed first, driving people to the smaller banks, which would then have had the resources to survive. Don't believe me? Ask who is thriving and not taking the same kind of risks that led to the problem in the first place. It's small banks. If some are failing, more are not. Mr. Obama, tear down those banks.
Categories: Wall Street
Tags: consumer protection Banks President Obama Wall Street
I wonder if you wouldn't mind expounding on your idea a little...why tear down the big banks? I understand the general idea, but what specifically about the breakdown of large banks is going to be the result?
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Rachel, that's a reasonable question. First, I am not a lone crackpot in the wilderness asking for the President to break up or in some other way restrict the size of the large banks. Many people, including many of his top advisors, have suggested the same thing.
In my vision, the way it works is this. The reason that some banks are “too big to fail” is that they have two characteristics. First, of course, is size, but the second is interconnectedness; in other words, the institution is so tied up with other banks, insurance companies, or other financial companies that its collapse would trigger a domino effect.
Now, we live in an interconnected world. The financial technology that creates that interconnectedness is not going away, and in fact I think it is a strength of our markets that they do mesh. But we need to have a mesh of roughly equal participants, not one where a single bank is so big that it's failure could not be absorbed by the mesh of institutions, but rather would simply take many of those that did business with it down, too.
There is plenty of discussion on the web of why no bank should be TBTF, so I won't rehash that here in depth. I want to focus more on the solution. Back in the 1980's, the government decided that Bell Telephone had too much power, and insisted it break up. Now, that break-up wasn't handled particularly well, but it does show us a recent example of a company that was TBTF, that was broken up, and its components were then able to fail if they couldn't compete. What regulators need to do is set it up so that there is a limit on bank size of, say, $500 bn in assets and deposits (roughly the size of Washington Mutual, which failed last year). Most banks count their assets in the hundreds of millions, so this limit effectively only exists for the really large banks.
What would this mean for you and me? Well, it would probably mean that USBank, with assets of just over $250 billion, would be fine, but BofA, with assets of $1.5 trillion, would be forced to break up into at least three separate institutions. And I just picked the $500 bn figure practically out of thin air. I would hope that someone with a better head for money than I have, or better yet a few someones, would sit down and figure out what a good maximum amount that could be absorbed, in a situation like we have now where high default and foreclosure rates are knocking banks off at a high, though hardly record, clip.
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