Yesterday’s JEC Hearing on Too Big To Fail did not include any financial industry representatives. This surprised me – surely they want to go public with their views on the future structure of the financial system? Obviously, they have great behind-the-doors access on Capitol Hill, but surely it is not in their interest to have right, left, and center piling on with regard to breaking up Big Finance? Yesterday, Thomas Hoenig, Joseph Stiglitz, and I were in complete agreement on this point, and my idea of using antitrust measures against major banks seemed to gain traction during and after the hearing.
Apparently, the committee invited a number of leading people from the industry (i.e., individuals who generally articulate the case for big banks) and they were all too busy to attend (Update: this statement is incorrect; the potential witnesses who were unable to attend are academics). This is a curious coincidence, because someone else – in an unrelated initiative – has been trying to set up a discussion involving me and people from the Financial Services Roundtable and/or the American Bankers Association, to be held at the National Press Club, but their calendars are completely full (i.e., there is literally no day that works for them, ever).
There has been some counterargument – e.g., against our Atlantic article on American oligarchs – from people who wish to defend the way that big finance currently works, but so far this has been quite limited in the public domain. The most pushback so far probably came from Carlos Gutierrez (Commerce Secretary, 2005-09), who argued Monday on CNBC that our argument is “somewhat sensationalist” and that it would lead to a wholesale and unproductive assault by government on the finance industry (i.e., an application of the Economics of Vilification).
But of course our argument, both in the Atlantic and more broadly, is not against finance per se. In fact, we’ve received some strong expressions of support from within the financial sector – just not particularly from firms that are Too Big To Fail – as well as from many in the risk-taking entrepreneurial sector. And here Thomas Hoenig – President of the Kansas City Fed, with long experience regulating, winding down, and generally overseeing banks; and very far from being a sensationalist – absolutely nailed it towards the end of yesterday’s hearing. My recollection of his exact wording is: whenever you have banks that are too big to fail, you will get oligarchs (yes, he said oligarchs).
Perhaps Mr Gutierrez and Mr Hoenig can be brought together in some form of public discussion?
Update (4/22, 8pm): No finance industry representatives were invited to the JEC hearing.
65 thoughts on “The Missing Witness”
Sounds like you feel miffed that the financial industry ignore your view of Too Big To Fail. You claim the push back “has been quite limited in the public domain.”
Yet, the biggest push back has already came from your own reader. The counter arguments are clearly articulated out here:
Perhaps you should first start by engaging in a honest debate with your readers on this issue first?
Keep the ball rolling, guys. You’re doing splendidly.
Isn’t the current crisis is as much about system wide adoption of unsound practices as it is about adoption of those practices by “Big Finance” i.e. those firms that were “too big to fail”?
While the present concentration is unsound for anti trust reasons, will breaking up the “too big to fail” entities prevent similar herd thinking from capturing the finance sector in the future?
That is how would breaking up these firm’s have:
1. prevented the development of the system wide belief that real estate prices could only increase?
2. prevented the securitization of sub prime mortgages into AAA rated securities that enabled too many unsound loans to be made in the first place?
3. prevented the widespread use of credit default swaps that tied the entire system together?
4. prevented the industry from exerting sufficient political influence to prevent effective regulation?
my transcription from about 2:24 into the hearing:
“So long as you have too big to fail, you will lead or have, oligarchies eventually. You have to have a mechanism that allows for failure, or I think you encourage that outcome.”
I politely second this. Even on this blog, many of your loyal fans remain somewhat unconvinced that too-big-to-fail is the problem we should be tackling most urgently and aggressively.
I see Silly Things is the resident Troll around here. Everytime I go to read comments, he/she has some pithy remark. Oh well, every site has one – just ignore them.
For those of you with a long car ride, I’ve converted the hearing to mp3:
Treasury may be pursuing a more subtle strategy against too big to fail. The WSJ ran an article this morning describing Geitner’s resistance to accepting TARP repayments (link below). As long as banks have TARP funds, they are subject to government oversight and taxes, which has led to some amount of brain drain to boutique banks (link below). Depending on the rate of brain drain and on Geitner’s ability to delay the acceptance of TARP repayments, the large banks could see a legitimate decline in market share. Currently parts of the media and the banking industry are using this as reasons the 90% TARP tax is a bad idea because it will encourage people to leave the bank, but I wonder if that was the goal (even though it diminishes the US Treasury’s shareholder value in banks).
This strategy could be effective if consolidation in the I-banking market has been primarily driven by M&A (which I assume is close to the truth). Then going forward, the government would only need to limit banking M&A activity rather than the proposed approach here of 1) creating fragmentation, and then 2) preventing future consolidation through M&A.
The key question on the validity of this approach is the rate of the share shift from too big to fail banks to boutique banks. Its a bit hard to tell at present given the frozen M&A markets, but does anyone have a sense of the rate and volume of brain drain (ie are the people leaving significant enough to steal share from leading banks)?
Bloomberg has a stream of the entire hearing:
Simon, you are performing a valuable public service with your campaign and comments. Thank you.
We have already suffered a “reverse nationalization”, in that the Street banks have taken over the US and our political process. Too big to fail means too big to exist. We must undo the oligopoly, in the interests of economic stability and democracy.
Ralph brings up a good point that openness may only be able to solve. In addition to the danger of ‘too big to fail’ you have ‘too tied in to fail.’ It’s not enough to solve just one or the other if taxpayers want to get off the firmly baited hook.
Since one of the biggest obstacles to excessive profits in the financial industry is a lack of secrecy (we are dealing with the one true commodity product) a logical strategy by the financial sector is to allow public anger run dry and then game whatever regulatory systems are put in place. Sticking their head out now would simply poison their ability to work in the back room.
Brilliant. Who knew a congressional hearing could be such fun?
Anyone here know how I could get my hands on a transcript?
Every Republican administration suspends enforcement of the Sherman and Clayton Act, and deep-sixes any consideration of industrial concentration. The big banks took this opportunity and ran with it, using leverage to secure market dominance, and now even routine antitrust enforcement will of necessity break up the oligoi of banks. All this cant from banker shills is designed to forestall antitrust enforcement.
Why should banks talk or, worse, subject themselves to questioning when it appears that they have the USG by the balls?
Just shut up, take the money, pay off a few Congressmen, whine about the unfairness of it all, then buy other banks, but don’t put any money at risk through lending.
A simple formula; why ruin it by subjecting oneself to uncomfortable questions?
Silly things, I think you need to go back to the same record you’re citing. When I review it, I see that the “pushback” provided there is minimal and neither grounded in cited factual references, or has already been responded to by James K.
As a former banking industry professional, I’m quite comfortable with Simon’s critique, and believe it to be a critical issue. To some degree Mr. Hoenig, whose credentials dwarf mine and presumably yours as well, agrees.
I think the idea is to constrain the realm of activities a banking institution can do. In that fashion, there are banks that will be issuing loans, there will be firms which will design, price, value and trade securities, and there will be instituitions that will issue insurances on products and activities, but all three units will be independent and will independently work to maximize their own profit and assess their own risk exposure, thus in the process limiting in a natural way the risk exposure that any of the other two can assume.
Without defending the tone of Silly’s post, I think there are two questions on the table:
1) Can we address too-big-to-fail after we’ve stabilized the economy, or is it critical to cut down banks as the absolute first priority? If it really must be the first priority, why? If it is not the first priority, what is (accelerating structural economic adjustment? addressing deflation risk? stimulus? stabilizing emerging markets? trade financing?)?
2) The underlying economic argument behind too-big-to-fail is moral hazard. Was moral hazard the real source of this catastrophe, or was it systemic risk resulting from a massively leveraged, unstable, and heavily coupled system?
The moral hazard/oligarch narrative is very compelling, although it’s mostly a story without statistical backing (e.g. stories about Goldman Sachs elites running a conspiracy, stories about banks taking govt-subsidized risk).
But the systemic-risk narrative is equally compelling… The IMF has painted us a pretty picture of what systemic risk looks like:
Click to access chap1.pdf
Figures 2.1 and 2.11 (pretty heat maps)
That is what policymakers mean by contagion.
Remember in 2007 how everyone said that our financial system was stable, and well-hedged, and “sophisticated”, and “robust”… How all of our policy-makers dismissed “contagion”, and told us that we had the world’s best quant-jocks holding the system together?
Now we have the IMF devote an entire CHAPTER merely to _detecting_ systemic risk (chapter III).
Clearly, systemic risk is a competing narrative. Very few people on this blog aggressively defend big banks, but several comments have expressed support for simply returning to a simpler financial system (a la 1970s) with less innovative financial products and more regulation (like bringing back Glass-Steagal). This is not inconsistent with having smaller banks, but smaller banks does not automatically mean simpler/more regulated banks.
Finally, with regard to too-big-too-fail, is that the end of the story? Some people argue that merely cutting banks down to size will rapidly fix the problems… (SJ, to his credit, does not – he’s clearly stated that we’re in for a lousy time no matter what.)
Or is too-big-too-fail merely the first step in a wider effort to impose greater regulation on banking? What should that regulation look like? (I don’t know where SJ and JK stand on how much regulation should be re-imposed; JK has written a thoughtful but inconclusive post on financial innovation and securitization, that generally ended with a subdued pro-innovation sentiment.)
Too-big-to-fail roughly translates into too-big-to-politically-ignore. So until we can get beyond the control of the mega banks and their lobby we are not going to get satisfactory resolution of the crisis NOR are we going to be able to contain the systemic risk because too-big-to-politically-ignore will always seek to use its power to maximize profits which means dismantling even reasonable regulation (why, because they can and they think they are infallible).
As I wrote yesterday, the bankers weren’t at the hearing because they didn’t have to be. http://tinyurl.com/d5b9k9
The Joint Economic Committee can hold all the hearings they want, and get everyone in some out-of-the-way hearing room to agree, but it won’t matter until the real powers in Washington side with you.
They don’t. Which is why you get Carolyn Maloney holding a hearing instead of Chris Dodd or Barney Frank. Hoenig is an insider, but he’s a marginalized voice inside the Fed on this issue. No one at Treasury or in the White House thinks the problem is an oligarchy.
You’ve got a lot more fighting to do if you want to break through those walls. As you, Stiglitz and Hoenig well know.
And you have an equally tough problem on the right, which is trying to raise a populist army against any government involvement in finance.
Clearly, you need Obama on your side. He’s the only one who can bring enough populist pressure to bear to overcome years of cronyism on the Hill and in the regulatory agencies.
By figures 2.1 and 2.11, I means figures 1.2 and 1.11. Just my mid-afternoon dyslexia kicking in.
@adam… sure, but the questions above remain unanswered in terms of timing and focus of critical reform & recovery efforts.
Great post. A secondary benefit of brain-drain is that some of the shadow market transactions will migrate to the boutique banks, where they may be more visible. I’m patient regarding Mr. Geithner….I have greater concerns about L. Summers; $5.2 million in consulting fees from a hedge fund? The hedge funds were down 18 percent last year, facing record redemptions in the last quarter. Why is Summers setting the priorities, and not Volcker?
I completely agree with your point of view. I think a more fragmented, vibrant, entrepreneurial banking sector would be better for all. This pool of “talent” (as they say) is not going to fall off the face of the earth. They will just move into boutique firms or start their own businesses. When these people put their own equity in their own businesses they can make as much money as the market will bear and no one can complain.
What good does it do to have all these people consolidated into something like Goldman Sachs?
Chris Whelan made the comment that people of your mind seem to have no natural representative’s in Congress. Do you feel the same? Is the Democratic or Republican parties more receptive to trust-busting Wall Street.
How about adding “sound money” to the debate?
Banksters wouldn’t be able to cause all of this trouble if they couldn’t create money out thin air, practically at will.
If the only money lent is money that already exists (i.e. representing actual wealth, rather than future pie-in-the-sky) it seems much more likely that we can have sustainable economic growth (i.e. without inevitable, highly destructive busts.)
Obama will be judged on whether or not 401Ks, housing prices, and (most important) employment stabilize by end of 2009.
If he achieves these, he will have earned the credibility to attack the banking problem head on and institute real long-term reform.
If Obama attacks the banks now, and this undercuts the semblance of a recovery that _might_ be starting to take shape, then he loses everything. Not only will the bank reforms fail, but he will be blamed for the economic catastrophe. The anti-govt.-intervention jihad will use the incident as proof that Obama’s active-government policies are a failure.
That is political reality, and the primary _political_ argument for waiting to address the oligarch issue until after the world is safe enough to go on a proper witch hunt.
The inherent risk – and the real reason that I believe Johnson/Hoenig/Stiglitz are attacking too-big-to-fail now – is the fear that when events stabilize, the window of opportunity for confronting the banks will have closed. Thus, it’s important to attack oligarchs now, even if that means incuring significant short term economic costs/risks.
If I am wrong about this interpretation, I would gladly be corrected.
StatsGuy, as to your first question, see the new post by James on The Missed Opportunity. Too-big-to-fail must be dealt with first because otherwise, any meaningful changes to the regulatory system will be blocked or deeply attenuated by the banking oligarchs. One reason that they will have the funds to keep up the lobbying pressure is because the politicians keep giving it to them. And then guess who gets the lobbying money?
If you want to wait for a full-blown statistical analysis of why this might be so, you need to first provide a method of statistical analysis that can be mathematically proven to be impossible to subvert by the rocket scientists owned by the oligarchs. Good luck with that.
On your question #2, one point of SJ’s argument is that it is no longer clear that moral hazard is the sole economic argument against too-big-to-fail, but that there is now a definable oligarchic political threat.
Thus, the argument is that 1) it is not possible to stabilize the economy while the banking oligarchs have excessive political control (e.g. by restricting the lending out of TARP funds they’ve received, forcing automakers into bankruptcy).
As JK’s newest post points out, the big banks are holding the economy hostage in an attempt to force the government to capitulate to the banks demands.
Systemic risk is not a competing narrative, it is the narrative. The choices are: 1) allow the banks to define systemic risk and self-regulate; or 2) have the banks be regulated by the political power; or 3) do nothing, and see what happens.
I’m not a fan of either 1 or 3. Are you?
“If he achieves these, he will have earned the credibility to attack the banking problem head on and institute real long-term reform.”
That’s a big IF. A huge one.
Most of the growing number of critics have argued that the attempts to save the huge, likely insolvent, banks, make matter worse and that’s on top of throwing good money after bad.
There is no doubt that if Obama is willing to give away trillions more to the big banks he could save them. That doesn’t mean our economy will benefit.
We may also end up with a short lived recovery followed by a much worse crash, having depleted much of our good credit.
Brad DeLong has a lovely and timely discussion of “sound money” – the gold standard – with a beautiful chart.
In all countries, relief from the gold standard marked the beginning of recovery.
One of the perks of being an oligarch is that you will enjoy privileged access to political power. Why would any self-respecting oligarch deign to appear in an open hearing and possibly be confronted by, by–what’s the word?–opposition when they could just as easily speed-dial their views in the usual unidirectional way?
As I mentioned in another comment, the “Gold Standard” has always been fictitious. The price of gold was routinely manipulated, but that was nothing compared to all of the paper that was issued under the pretense that it was convertible even though there was nowhere near enough gold to cover it all. The results were utterly predictable, as were all of the hoocoodanodes.
I’m not surprised that ending that fraud helped in recovery. I expect that ending the current fraud inherent in our banking system, will lead to a much greater recovery and, perhaps better, an enduring one.
“Can we address too-big-to-fail after we’ve stabilized the economy, or is it critical to cut down banks as the absolute first priority?”
In his testimony Geithner talked about making the banks (by which he meant only a few, select banks) healthy. If we wait until the banks that got us into this mess because they relied upon being bailed out get healthy, and the economy is stabilized to address the too big to fail issue, it will very difficult politically to address it. The ueber-banks will lobby against it, along with other welfare capitalists, and they will be healthy and strong enough to mount a powerful political defense. In addition, with the economy in recovery, the urgency of action will have diminished. If it is possible to restore the economy while dismantling, say, Citibank and BOA and some others, then we should do so. If not, we should take political action now to ensure that they will be broken up in a year or two. Maybe the PPIP should be buying up the banks, not just the bad assets.
“The underlying economic argument behind too-big-to-fail is moral hazard. Was moral hazard the real source of this catastrophe, or was it systemic risk resulting from a massively leveraged, unstable, and heavily coupled system?”
Isn’t this a chicken and egg question? In 1984 Continental Illinois was deemed too big to fail, and got bailed out. But it was hardly the first recipient of corporate welfare. Whether it, and other large banks, had been hoping/relying upon bailouts before then, they could certainly count on them afterwards. One result was increasing systemic risk, abetted by ideologues and fellow travelers in government. I don’t think that you can disentangle the two.
Also, the too big to fail problem is not just one of economic moral hazard. It is one of democracy vs. oligarchy. This is not a new question in our country, witness Jay Gould’s comment about “the best legislature money can buy”, but it is still an important one. Do we wish to be ruled by amoral agents that, as Andrew Jackson said, “have no ass to kick and no soul to damn”?
“Obama will be judged on whether or not 401Ks, housing prices, and (most important) employment stabilize by end of 2009.”
Geez, I hope not. Housing prices are still at historically high levels, despite what may be an oversupply, and employment is a lagging indicator. How likely is it that either will stabilize by the end of the year?
“If he achieves these, he will have earned the credibility to attack the banking problem head on and institute real long-term reform.”
Obama entered office with amazing political capital. True, he could blow it, but he does not have to earn credibility. On the other side of the question is the credibility of the ueber-banks. Once the economy has turned around, they can say, see, everything is OK, we are your friends, you can trust us. Despite whatever heroic efforts the government has made on their behalf. If you are going to go after the banks politically, the time to do so is when the people are mad at them. And that is now.
I can’t see what silly things is saying– i do see what look like posts from toobigtofail bank shills, but other than that, all i see is ideas that complement your views, not any kind of push back from your readers.
Also, you dont even sound miffed, you sound more like you are just reporting what you already expected! By never having to get into a room with you, they will never be faced with someone who honestly will challenge their history. Any questioning they get, is always just a rediculous show for the public, because they know their questioners (our elected officials who are heavily supported byt the bank lobby and most all of them are friends with these folks) will all back down, and not ask follow up questions, or they run out of their silly time…
By having private banks, the corruption wont end by anti trust actions, it will just cause a little pain–JUST LIKE CUTTING UP A WORM…
Please, consider the idea of no longer having a private bank makingoff (madeoff?) with our money supply…the source needs to change or there is no way of getting rid of the worm.
Smaller firms like the ones that would result with antitrust applications would be fine, as long as our country didn’t have a private money system…that is where the robo mama worm lives.
If we get DOW 3000 or even DOW 5000 and all that goes with that, I think we will all have to question the value of having allowed ourselves to believe that we were supposed to prop up and pass money into possibly failed banks, and “infusing” money into big banks and encouraging them to buy smaller banks ( the USBankcorp CEO told a group of people this is what TARP 1 recipients were told by treasury, and that they were to NOT lend with that money–see twincities.com mid Feb 2009 for the article)
The fall of 2007 was the perfect season for smaller and regional banks that were not corrupted by poor management, and investing, to step in to buy the pieces of the BROKEN MONSTERS THAT HAVE BEEN CREATED BY OUR CURRENT MACHINE! Instead, now we have a stress test that may finally be the way to knock off the smaller guys only to make the big monsters bigger–this is not an oligarchy, this is a monopoly.
We are to believe that the 700billion TARP is necessary and 185billion for AIG is necessary– If the monster bank (that is a MACHINE) bankrupts our country, i think of how people will look back, and wonder how much it might mean for our national security to still have credit and still have the ability to use that money to either feed a country with homeless hungry unemployed people, or possibly use that money to protect our country from enemies?
The bank lobby has a death grip on all of us… read Martin Armstrong’s “Behind the Curtain for a recap of what is becoming very obvious these days. And, read “Move Over Adam Smith, The Visible Hand of the US Government” http://www.sprott.com/marketoutlook/specialreports.php
to see a really good report on how the fed actually steps into our market to buy securities to manipulate the market–you’ll have to read the paper, but, even though the reasoning is “national security” when you consider the ramifications of what this means to anyon who might want to invest in capital markets, it is very disturbing–
I think that this is just one more bit of corruption, and there is no excuse whatsoever for this…i am wondering if we really have centraly planning economy disguised with a periodic vote just to keep the masses happy…no joke.
Supposedly we can’t do without all the innovation that our current monopolistic ( oligarchy is just a front, it is a monopoly ) have brought us–if we get Dow 3000 or Dow 5000 will that be enough for people to decide that we have to fully redo our banking system?
It would be a fun exercise (I don’t know if some enterprising economics grad student has already done this) to compare very large businesses with governments. The primary argument against government intervention in the private sector as I understand it is that the government does everything less efficiently than does the private sector. But given the size of these banks, are they not now encountering many of the same inefficiencies that are inherent in any organized effort so large? In other words, do they not now face many of the negative characteristics of their would-be government custodians? I tend to believe a similar dynamic is involved in our health insurance industry. These companies are simply too large. This doesn’t defend the government, but I don’t think we have a better way of running our country. I do think, however, that breaking up the large banks offers a plausible alternative way to reintroduce the paradoxical “efficiency of anti-scale”. We have all learned about why large companies can make more than small ones (economies of scale), but it seems perhaps that there is a limit to just how large a company can be before the benefits of this situation reverse themselves? Add to that the political blackmail these organizations are capable of using and willing to use, and I am sold on breaking them up. Just a thought from an economically uneducated academic…
The Federal Reserve Systmen makes it’s own policies and gives loans to our country AT INTEREST–the bust times are boom time for the private bankers that own the Federal Reserve Private banks….this is the heart of the machine that drives the decisions that we’ve seen since the inception of the Federal Reserve Act, but it is most obvious now with the bailout–how much interest do you think is on the 12.8 trillion that is being put into the system for all of us?
And why should we pay interest on this money?
The thing you’re missing here is that the banks pay these guys that were asking you the questions. I assume you didn’t bring a sack of money with you to reinforce your arguments. In this country the only thing that really talks in money. They can listen to your arguments, thank you for coming, and then turn around to the bank lobbyists and say, “See what you’re up against? If you want to prevail here, you’re going to have to make another campaign contribution so I can get reelected.” End of story.
I don’t think it’s that “Too Big to Fail” IS the problem to tackle. It is that whatever advances we may make in the future with regard to any kind of economic recovery will be in vain if we do not address the anti-trust issue of large banks at the same time.
Try the Federal News Service website: http://www.fnsg.com/transcript.htm?id=20090421t0390
or you can watch a video of the hearing from the U.S. Congress Joint Economic Committee website: http://jec.senate.gov/index.cfm?FuseAction=Hearings.HearingsCalendar&ContentRecord_id=c89b185b-5056-8059-7670-0ce56df64713&Region_id=&Issue_id=
Congratulations, Simon, for a principled and effective strategy to bring sanity and pro-ordinary people approach back to DC.
It has been obvious since last fall that the Establishment blessed Obama to win, to present a fresh face to the world so that it could continue the same old ways. That’s why he led the Dems in getting TARP I/2 through, hired the same old bankster guys in Geithner (whose tax problems would have scuttled him in any other time) and Summers, and continues to argue for debt expansion.
Watch for an expanded war in Pak-ghanistan, following BHO’s more aggressive helicopter war policy guaranteed a response on the ground from the Taliban. This will guarantee an unending need for debt and will “stimulate” the economy further.
Sadly, it will take a deeper crisis for the good guys to win out.
Thank you Min– I say, where is Andrew Jackson when you need him? He was demonized in the textbooks to further the “private central bank” concept. We need to dismantle the private federal reserve bank so that we are not paying interest to the money that is put into circulation…next thing you know, we will all have to give up our gold! Also, we are moving toward a world currency–and if you think this is ok, take our American private system, and imagine the power of a global monopoly! We keep on using the term oligarchy–but, believe me, it isn’t –it is a monopoly.
Ralph, I will leave your questions alone in specific, but in general, the response to your questions is that the power from a private group (federal reserve bank owners) and public toobigtofail management, that lobbies for control, then uses is to loosen and manipulate all regulation to maximize compensation ( using 40x leverage gave bigger balance sheets on which to get compensated) and to widen the spectrum of “possible” risk taking without regard to the end result which is world wide economic devastation since the end result will be a bailout which will protect those who benefited all along, but extracts future earnings from all taxpayers. The intent of anti-trust regulation was very clear, and clearly, the private federal reserve system violates this intention, and all public “too big to fail” entities, are tools of this private powerful system–more of a monopoly even though there are 300 shareholders, than an oligarchy–with something this powerful, oligarch is symply not an effective way of describing what is in power with the Federal Reserve Act.
I hope the issue will find it’s way deeply into the minds and hearts of all American’s and that they will not turn away from the importance of this issue. And, with this understanding, we will find plenty of new elected officials to actually represent this righteous just, concern.
I think you are correct about financial industry capturing the regualtors. It has always been, always will be.
I am also a lawyer. I can tell you ‘too big to fail’ is not currently recognized as a criteria for antirust regulation or more importantly, enforcement via private rights to litigate the issue. Private parties litigating is always more efficient than regulation. Journal of Finance article cited below also notes that securities markets are most efficient when policed by private litigation rather than regulation.
I like your thinking. It requires legislation.
“What Works in Securities Law”, ABSTRACT: We examine the
effect of securities laws on stock market development in 49 countries.
We find little evidence that public enforcement benefits stock
markets, but strong evidence that laws mandating disclosure and
facilitating private enforcement through liability rules benefit stock
markets. Published in the Journal of Finance,
I think it is true that politicians and administrations are judged on simplified, objective bullet points within their term limits (e.g. did my 401k go up, did my house value go up, are gas prices low, did I keep or lose my job, etc.) This is unfortunate because it means no real long-term change is pursued or accomplished because voters will not see the results in time for the next poll. I’m sure it is playing a role here and now as well. Case in point; Senator Risch asked the panel at the JEC hearing 04/21 if TARP was a good idea. When Dr. Johnson explained that the financial crisis is not a liquidity problem but a solvency problem, that experts at the G10 level were telling the U.S. for two years that it was a solvency problem, and that it should be addressed using the kind of approach Dr. Hoenig outlined, Sen. Risch’s response was, “I understand what you’re saying, but none of those people need to go out and get elected.”
Too big to fail? We act as though our banks operate in a walled garden and all they grow is services for domestic consumers!
Where are multinational companies going to turn for services? – not your local credit union. How is a company going to decide to list on the NYSE, London or Tokyo? – from your local corner bank branch.
This downsizing of our banks only makes sense if – 1) all the global banks are disassembled, or 2) global regulations with teeth are put in effect. Otherwise we are turning an industry that has performed admirably since the ’33/’34 acts (ok, a recent exception) over to their global competitors (which, by the way, is where US bank employees are already going)
Agree. Finally, someone who sees the reality of the situation in America. Until the wholesale ownership of Washington by Wall Street is unraveled, the outright theft will proceed.
I noticed you called banking and finance an “industry”. I humbly disagree that finance is an actual industry. I would suggest that banking and finance are services. Viewing the storage and manipulation of money as an industry, is, to a certain degree, what may have caused the current crisis in the first place. Manufacturing, is industry. “Actual” industry supports service based business’s (like banks). Without actual industry, there are no service-based business’s.
It may be a good time to begin to put finance and banking in it’s proper place. “To big to fail” can’t happen again then.
The banks performed admirably until the S&L partial deregulation — partial because FDIC insurance remained. Even a layman like me could see the moral hazard in that. And things only got worse after that.
Hurray for noble technocrats like Simon Johnson, Thomas Hoenig, Joseph Stiglitz! Perhaps there is a chance that the US and the world will avoid a lost decade of their own after all. Keep the pressure on gentlemen – and Godspeed to you all!
I would just add that too-big-to-fail banks are not the only issue. The finance sector as a whole grew too large.
We need a strong financial sector. But optimal growth and prosperity don’t require one of the magnitude we had/have. The excess size resulted in a large part of that sector turning into reflexively fueled wheel that span ever faster until it broke and flew apart.
Empirical demonstrations that a shortage of investment capital did not and even now does not constrain growth significantly:
The knee jerk reaction of too many supposedly serious people to blame deregulation, the ‘undue influence’ large banks exercised over congress, and the failure of free markets in an effort to ‘improve’ the financial system seems a bit ingenuous to say the least. This is the time for serious consideration of the facts, and it seems strange that there is no reasoned discussion about the role congress and regulation (e.g. Community Reinvestment Act, deposit insurance, and stimulative fiscal policies) played in the creating the current crisis. Is it any wonder, that most bank CEOs and academics who hold non-PC views would avoid the circus of public lynchings and posturing designed to ‘use the current crisis’ to ram through ill-conceived changes?
Based on the level of such long-term entrechment by such private wealth interests such as those represented by the core Bilderberg, Royal Institutue of Foreign Affairs (Pro-Socialist/Communist[?] International Mother Ship to the Council on Foreign Relations, which Obama, his wife Michelle, McCain, Hillary, Bill, and many others in DC subscribe to), and that we fought Red Coats purchased by these same banking families (particularly the Rothschilds family, which was funding King George at the time), the no-longer-secret meeting on Jeckyll Island, Woodrow Wilson’s regrets for handing control of our currency to these families…
…is there really any way to get these people out of our lives, ever? They seem to control most of everything. Perhaps a peace agreement needs to be struck. You don’t want 6 billion people pissed off at you.
You forgot – “And take obscene fees, salaries and bonuses during the process.”
Finally someone is getting to the root of the problem!
Unfortunately, there are no effective means to eliminate these people since they coop every major government regardless of ideology. Even violence may not get these folks out of our lives. The also control the flow of weapons and usually fund both sides of every conflict. The decision makers in both government and private sector big business are paid to play along. They get the little people caught up in the minutia of policy and ideas (Just read all the babble from the concerned citizens above.) There will be unintended consequences sooner or later as the masses run out of clean water and wake up with nothing to eat and nowhere to turn. They’ll try and turn us against each other but the shear number of have-nots will be too big to fail in their takeover. But, unfortunately (again!) nothing sane will emerge from the chaos. It isn’t too late to slow the slid into this messy heap of humanity. Press all you know into a less greedy why of life and insist that your elected leaders do the same. Otherwise…
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