The Too Big To Fail Subsidy Debate Is Over

By Simon Johnson

No doubt there is still a lot of shouting to come, but this week a team at the International Monetary Fund completely nailed the issue of whether large global banks receive an implicit subsidy courtesy of the American government.   Is there a subsidy, is it large, and how much damage could it end up causing to the broader economy?

The answers, in order, are: yes, there is an implicit subsidy that lowers the funding costs for very large banks; the subsidy is big, with costs of borrowing for these banks lowered by as much as 100 basis points, i.e., 1 percentage point; and yet this large scale of implicit support is small relative to the macroeconomic damage that is likely to be caused by the high leverage and incautious risk-taking that the subsidy encourages.

If anything the IMF’s work provides a conservative (i.e., low) set of estimates.

Still, as I explain in my NYT.com Economix column, I’m a big fan of this work because the Fund’s report is very good on how to handle and reconcile the main alternative methodologies for getting at the issue.

The Fund offers an entirely reasonable approach that sets a very high quality bar. The Government Accountability Office (G.A.O.) is expected to produce a report on TBTF subsidies in the summer; their work now needs to be at least as careful and as comprehensive as that of the IMF. The same applies to the Federal Reserve and anyone in the private sector who attempts to dispute these numbers.

15 responses to “The Too Big To Fail Subsidy Debate Is Over

  1. I still say charging over 10% on ANY loan, is a crime against humanity.

  2. Even Bush sent the “little guy” a $600 check from the IRS as he left town.

  3. Well then, you see, he wasn’t all bad now was he?

  4. Yeah, “selling” a war is unique.

  5. Litecoin co-founder with his brother Charles Lee

  6. Yea, those hard liners, you can’t live with um, and you can’t live without um.

  7. Even if the GAO and the Fed come out with a critical report, you know neither party is going to do anything about it. This is pure rent-seeking at its finest. They are bought and paid for

  8. http://www.pbs.org/newshour/bb/swiss-consider-welfare-overhaul-guaranteed-minimum-income/

    TONS of Prima Facie evidence that the “list” keepers who LABEL people as “anti-wha’ever” is MUCH MORE VICIOUS and so much more destructive than anything McCarthy got away with….no one believes USA will come back from the 1%ers insane and delusion reasons for revenge-ing and their persistence in operating from their dark pools…

    Europe, Russia, and even Australia are pulling further ahead – nanosecond per nanosecond – which means USA is already bankrupt….the 1%ers are crying that USA is “broke” even when they hold all the FIAT $$$$ – 2.08 TRILLION. Makes LOGICAL sense, right?

    Everyone knows what they are seeing in USA. NO ONE will ever waste even 10 minutes of TeeVee propaganda blather arguing FOR HOW the theft was done – “revenge theft”….

    50K from 40 million – 40 MILLION on one list or another….????!!!!

    The entire PRODUCING Middle Class – WHY?

  9. donthelibertariandemocrat

    “Here was my comment on Curious Capitalist:
    I agree about the need for minimal but effective regulation. However, even though in this crisis I favored a version of the Swedish Plan, partly because, based on the market’s reaction to the Lehman decision, I believed that it is the best real option, I also believe that there was an implicit government guarantee to intervene in a crisis such as this which helped fuel the earlier investments and the actual expectations of what would happen in a crisis. I believe that such a , now explicit guarantee, needs to be examined. I’m wondering if you do as well.
    Posted by Don the libertarian Democrat | October 10, 2008 2:14 PM”

    &

    http://reason.com/archives/2008/10/08/building-a-better-bailout/1#comment

    “Don the libertarian Democrat|10.8.08 @ 2:26PM|#
    “When the federal government guarantees bank loans or assets, banks have less incentive to evaluate loan applicants thoroughly, but they do have an incentive to engage in riskier behavior than they would otherwise undertake.”

    Bingo! That’s what I’ve been saying all along.
    The reaction of the credit markets to the failure to bailout Lehman showed that the market players were expecting a bailout. The real analysis needs to take into account the real world implications of government interventions in financial crises. Without a clear understanding of what that role will be, it’s hard to know exactly what investors are relying on in making many of their decisions. If they’re assuming government intervention, one can assume that their decisions are different than if they weren’t.
    Again, we also need to know the actual assumptions that various parties in this crisis were relying on. If a government bailout is one of them, that seems very important to me to know.
    The real question is whether or not government will intervene in situations like the current one. Without an answer to that, it is very hard to determine what will actually occur in the real world, or what a rational policy should be.
    There’s no point going on and on about the free market without knowing the actual assumptions and restrictions we’re laboring under.”

    &

    “MONDAY, OCTOBER 20, 2008
    “One purpose of this plan is to drive consolidation.”
    Score one for Surowiecki. From the NY Times:

    “As the Treasury embarks on its unprecedented recapitalization, it is becoming clear that the government wants not only to stabilize the industry, but also to reshape it. Two senior officials said the selection criteria would include banks that need more capital to finance acquisitions.
    “Treasury doesn’t want to prop up weak banks,” said an official who spoke on condition of anonymity, because of the sensitivity of the matter. “One purpose of this plan is to drive consolidation.”
    I understand this as a temporary move, but don’t find consolidation, or creating very large banks, a positive development in the long run.
    As well, I don’t think that a credit stimulus plan that doesn’t stimulate lending to be very useful.
    POSTED BY DONALD PRETARI AT 9:49 PM

    Good to be proven right all these years later.

  10. http://www.huffingtonpost.com/2014/04/07/new-yorker-cover-obamacare-medicine-republicans_n_5104008.html

    revenge….

    “As well, I don’t think that a credit stimulus plan that does not stimulate lending to be very useful.”

    Indeed, but it was never meant to be “useful”, was it? Or am I reading the invisible ink between the lines all wrong….? :-)

    From wikipedia:

    “Just War Doctrine[edit]
    The just war doctrine of the Catholic Church – sometimes mistaken as a “just war theory”[16][17] – found in the 1992 Catechism of the Catholic Church, in paragraph 2309, lists four strict conditions for “legitimate defense by military force”:[18]

    – the damage inflicted by the aggressor on the nation or community of nations must be lasting, grave, and certain;
    – all other means of putting an end to it must have been shown to be impractical or ineffective;
    – there must be serious prospects of success;
    – the use of arms must not produce evils and disorders graver than the evil to be eliminated (the power of modern means of destruction weighs very heavily in evaluating this condition).”

    Letting this go on since 2008 with so much BRUTE PSYCHOLOGICAL FORCE – like REMOVING the protections of the 4th amendment for a producing Middle Class in USA through “The Patriot Act”….? What “capitalist” theory is THAT?

  11. Dickens era economy proves the Neanderthal gene needs to be weeded out of the “anglo” stream…Koch sucking savages overturned THIS:

    http://en.wikipedia.org/wiki/Fourth_Amendment_to_the_United_States_Constitution

  12. @Bingo! That’s what I’ve been saying all along.
    The reaction of the credit markets to the failure to bailout Lehman showed that the market players were expecting a bailout. The real analysis needs to take into account the real world implications of government interventions in financial crises. Without a clear understanding of what that role will be, it’s hard to know exactly what investors are relying on in making many of their decisions. If they’re assuming government intervention, one can assume that their decisions are different than if they weren’t.

    Don that’s great, you proved yourself right, but your premise was wrong. The idea that Lehman failed, but not other large important institutions, is where the conversation should have started. Instead it lead to a break in the mark to market economic accounting where debt doesn’t matter until it’s too late to fix it, and then must be born again new somehow in order to survive. It’s the parasite finally consuming the host and considering where to go next, or can I make until the next host arrives. To me you seem to be walking the sharp edge of the two sided coin, i’ll give you a hint, it’s easier to walk the tight rope instead.

  13. Well, it’s nice that the IMF proved what we all knew, but how do we cause this to have a policy effect? The crooked, subsidized megabanks astill own Congress.

  14. @Nathanael, The Fed, and U.S. government, are driving, amongst many others, a monetary positive feedback loop; Ironically enough, [true] capital markets will correct it — that is it will be policy. It will not be pretty.

  15. “Love Funding” – now that’s a beyond cynical name for a company straight from the Department of Disembowelment of the Living….(“positive feedback loop”?)

    Hey, who came up with withholding IRS returns to the kids? The busybody babushka PAWING through DEAD PEOPLE’S records with the IDEA to use Ancestry.com when the parents died while owing IRS taxes??!!

    Another interpretation of The First Amendment?

    WORSE THAN McCARTHYISM….THE “anti” list….