Diana Farrell And The White House Theory Of Bank Size

On Friday morning, Diana Farrell – a senior White House official – made a significant statement on NPR’s Morning Edition, with regard to whether our largest banks are too big and should be broken up.

 “Ms. DIANA FARRELL (Deputy Assistant for Economy Policy): We understand Simon Johnson’s views on this, and I guess the response is the following….  

 “Ms. FARRELL: We have created them [our biggest banks], and we’re sort of past that point, and I think that in some sense, the genie’s out of the bottle and what we need to do is to manage them and to oversee them, as opposed to hark back to a time that we’re unlikely to ever come back to or want to come back to.” (full transcript)

Ms. Farrell is Larry Summers’s deputy on the National Economic Council and the former director of McKinsey Global Institute, and she has a strong background on banking issues – based on extensive professional experience with global financial institutions.

Her statement contains three remarkable points.

First, “we have created them” is exactly right.  Today’s mega-banks were not created by any market process.  They are the result of a series of government actions and inactions, particularly over the past 18 months.  Banks failed due to their own mismanagement but how those failures were handled – bankruptcy vs. bailout – was a conscious official decision.  This administration deliberately chose to be very nice to the biggest banks and to the people who run them.

Second, “we need to… manage them and oversee them”.  Here she is presumably referring to the administration’s regulatory reform plan, which does not appear to be going well.  Once the massive banks were created, and implicitly backed by the government, it became (already by April or May of this year) very hard to reregulate them.  As Joe Nocera pointed out on Saturday, the biggest banks have essentially bitten the Obama administration hand that fed them – most obviously by opposing the new Consumer Financial Protection Agency.  It is already abundantly clear that the White House cannot control our big banks.  What hope do mere regulators have?

Third, “we’re unlikely to ever … want to come back to”.  Ms. Farrell’s specifics on this point were summarized by the interviewer, Alex Blumberg, “The problem with Johnson’s approach, [the administration] decided, is that bigness also has its benefits. Sure, the economy used to be simpler and financial institutions weren’t so big and dangerous, but GDP was smaller then, too, and people were poorer.”

I’ve reviewed the available work of Ms. Farrell, the McKinsey Global Institute, and other publicly available sources on this issue (e.g., this book, profile, and article).

I haven’t found even an assertion that our largest banks should get bigger, in absolute size or relative to the economy, let alone any facts or relevant empirical evidence.  If I have missed a convincing quantification for “bigness also has its benefits,” please draw that to my attention.

Perhaps there is a reason that today’s nonfinancial companies need a financial sector that is more concentrated and more powerful politically than ever seen in living memory – maybe this emerges from the Financial Services Roundtable or the government’s more confidential interactions with CEOs.  But my conversations with people who run companies or who work closely with nonfinancial executives suggest quite the opposite – they see our current financial system as dangerous, with the likely costs of big banks (e.g., future bailouts) greatly outweighing any benefits.

Here’s the end of the NPR segment, where Alex Blumberg gives a fair summary:

 “BLUMBERG: In the end, what we should do about the genie comes down to how you think about it. Farrell’s view and the view of economists like Calomiris from Columbia is that the genie does lots of good things for us and that we can learn to restrain it.

For Johnson, the good things that the genie does are outweighed by the bad things and we should be thinking hard about how to get it back in that bottle before it wreaks havoc once again.”

If Ms. Farrell and the White House (or anyone else) has hard numbers we can put on the benefits of big banks, please make these public.  We can then weigh these against the obvious costs of running our financial system in this fashion – on this round alone: fast approaching 40 percent of GDP, i.e., the increase in government debt as a direct result of our financial fiasco; plus persistently high unemployment; millions of homes lost; likely permanent loss of output, etc.

Philipp Hildebrand, now head of the Swiss National Bank (SNB), expressed a more moderate official position in June, “A size restriction would of course be a major intervention in an institution’s corporate strategy… Naturally the SNB is aware that there are advantages to size. [But] in the case of the large international banks, the empirical evidence would seem to suggest that these institutions have long exceeded the size needed to make full use of these advantages.”

 By Simon Johnson

127 thoughts on “Diana Farrell And The White House Theory Of Bank Size

  1. Advantages of size, economies of scale were not viewed as convincing arguments to prevent break-up of Standard Oil or AT&T.
    Banks, of course, are different (post-Reagan Administrations have been different, too).

  2. Indeed, it’s worth questioning whether the entire concept of “economies of scale” applies to information-based services such as banking.

    Since the ‘service’ is digitalized, distribution and replication should have a near linear expense/size ratio.

    Of course, this has never prevented artificial scarcities from appearing.

  3. Remember the similar problem of Bell and then the baby Bells? I can’t see any reason why we can’t take Goldman Sachs and split into say 5 enterprises. Maybe call one of them Lehmans? Another (you name it). First immediately recover all government funds or hand over equity at a great price. Then separate commercial and merchant functions, then split. then sell baby GS’s to benefit Joe E Public! Have a maximum stock share to be held by each investor with NO exceptions. Mega banking deals now are covered by consortia of banks so what’s new?

    Too hard? Your just being modest. We knocked over bigger troublemakers. How about Tojo and his Nazi buddy? Probably too young to remember? Now let’s do something for America and now!

    I’m with you Simon, let’s hunt bear!

  4. It’s time to name the names, and the public disclosure of how many homes these a-holes own. Like, “You can keep the Swiss chalet, but we’ll need you to divest your four other vacation homes spread throughout the world…for the good of the country and all that.”

  5. why of all places the Swiss chalet? because the Swiss have recently shown willingness to extradite?
    do you really think that willingness would ever extend to financier?

  6. Not sure about the banking sector per-se, but in industrial sectors, efficiencies do not scale linearly with corporate size. Casual analysis would seam to indicate that diminishing returns on efficiency is hit long before companies stop growing.

  7. Mr Johnson, as usual, expresses himself with
    admirable suavity. I believe he is saying that
    the Big Banks — i.e. the Rich — have captured
    the U.S. government; and that this is not good.

    So: how do we take it back? I dunno. But it would
    seem to be useful to work out a theory of what size
    bottle we wish the genie to fit into.

    With this in mind, I repeat some words I posted a
    day or so ago in the thread: “The problem with

    I posted back in July to the effect that
    money is IMPORTANT and should not be played
    with. I said then that we need experts, or
    maybe we need non-experts, to tell us what
    financial practices serve a useful social
    purpose. I can think of a few — insurance
    of tangible goods, mortgage loans, other
    kinds of loans for business startups or
    for business development — but my list
    doesn’t reach as far as securitizations
    in the Blackian sense(Bill Black called this
    process fraud pure and simple, right?),
    credit default swaps, and derivatives.
    (What is “notional value”, anyway?)

    The posters on this E-list are _so_ smart, _so_
    well-informed! I would like for them to
    respond to the question: what does a sensible,
    socially beneficial financial sector consist
    of? If we could come to some agreement on
    that, we would be able to make some reasonable
    suggestions for possible restructuring and
    regulation. At present too many of us are
    running around yelling about the Awful Bankers,
    their Excessive Salaries, and Why Can’t the Gov’t
    Do Something.

    Best wishes,

    Alan McConnell in Silver Spring MD

  8. Thanks for this. It does answer a lot of questions about policy decisions directly. Things that we have just assumed and misunderstood. Giving Obama the benefit of the doubt, we believed that he was just working to stabilize the life of the patient first, and then he was going to operate. Nope, that patient doesn’t have health insurance, he is stabilized and now dismissed from the hospital to run loose in society. It’s political triage, Obama did what is best for his chances of re-election. I’m disgusted.

  9. Let’s see what the White House has to say after the next crash. The banks continue with the same lunatic bets that imploded them before. These days, it’s bonds and currencies, commodities, hedge fund lending. All the preexisting incentives remain in place. One only need wait for the bang.

    For those without jobs, go back to school; mortgage your future and learn about how you continue to be screwed by each successive administration, Republican or Democrat. Nothing changes except the rhetoric. Now if there was just some way to make money understanding all this….

  10. 1) What happened to the spirit of anti-monopoly laws?

    2) Banks create a public good: money (or, more exactly 4/5 of it). Then they give it to whoever they please, according to their private judgement. This strange control of the private few over the public ought to reinforce the anti-monopoly spirit, because it is not disposable goods or services banks are producing, but the essence of currency.


  11. ” It’s political triage, Obama did what is best for his chances of re-election. I’m disgusted.”

    Judging from what he says, economics is Obama’s weak suit. He just repeats what Summers tells him.

  12. Because who wouldn’t want to keep their Alps home. It’s very pretty there…

    Bringing some American irony to the game. The most effective message during the campaign against McCain was the ‘he has 8 or 9 homes’. This worked very well with my Reagan-democrat brothers who hate the Democrats more than the Corrupticans(Repubs.) Of course, electing Obama has been a disaster in regards to the Banksters, but this shame technique does fly with the majority who use T.V. as discourse.

  13. I think that it is time for all of the citizens being shafted by Wall Street to march on Washington demanding the removal of Larry Summers, Tim Geithner and all of their disciples from their positions.

    Until they go, no meaningful reform of the financial industry to protect and benefit the average citizen can occur.

    Why is no one talking about reinstating Glass Seagle (Sp?)?

  14. No one is talking about it in the USA, but in the EU, some of the heavy weights do.

    And why so much silence? Vested interests. In France when the head of a major, profit making giant bank makes 4 million dollars, it’s scandal. But if Rahm Emanuel, that famous banker, and experienced financier, makes 16.2 million dollars in 2 years, that’s business.

    The Rahms of the USA would not bully their way up to the trough, in the future, if banks could not take the money of the public and invest it in their casino in the sky they set up for themselves, heads they win, tails public loses…


  15. how is the bullying done in France?

    or do you want to imply there is no bullying in France?

    I remember listening to a recent podcast on some shady financial dealings, might have been corruption or of-shore-banks. The exciting part of it was that they said they concentrated on the US because it was the country where figures were most readily and amply available

    I love info-bits about Catch 22s like these
    – first you demand that everything is to be in the open and then you chastise the country which most readily complied and disregard the others whose figures are not available and who thus can crown themselves as holier than thou

  16. That was one of the more funny moments of the campaign. And the funny thing is people thought McCain couldn’t remember. He knew he’d been “busted”. He was trying to figure out how he could sell “Joe-Sixpack” he was in their corner if they knew he had so many homes.

    And can you imagine what Fox and company would have done to a Democrat’s wife with migraine headaches and breaking her arm with a handshake??? In less than 24 hours they would have had her with green skin and a pointy witch’s hat.

  17. Sure, the economy used to be simpler and financial institutions weren’t so big and dangerous, but GDP was smaller then, too, and people were poorer.

    This contains several lies.

    1. Almost all growth in the real economy occured before financialization, which has presided over only the zombie “growth” of exponential debt. As we now see, the so-called middle class this allegedly uplifted was really a debt hallucination, hypnotized while its wages, good jobs, and the safety net were destroyed.

    The banks presided over all of this.

    2. “People were poorer”? According to what measure? Under financialization wealth concentration and corporate power increased tremendously, to the point that no rational person can say we even have a true democracy any longer.

    We are relatively much poorer in economic and political power, and therefore by any measure of freedom.

    The banks presided over all of it.

    3. “People were poorer”? And what did this alleged middle class do with all this alleged wealth which supposedly trickled down to them? Did they use it to strengthen social protections, expand public services, upgrade infrastructure, provide themselves with all the amenities and benefices of public property, public space, a strong and fulfilling public life?

    Did they go from poorer to richer?

    No, they burned it all. They squandered it in a corporate- and government-organized “consumer” orgy. They dreamt it away in bubbles.

    However “poor” they allegedly were to start with, they went from richer to poorer.

    Now it’s all gone, except for what was stolen and now lies rotting in bank vaults.

    And the banks presided over all of it.

  18. I think Simon is ready to hunt bear also. All he needs is to find a gun. All he has now is a fly swatter. Which is not his falt.

  19. Ed: ¨I think that it is time for all of the citizens being shafted by Wall Street to march on Washington…¨

    Well, that time has long passes. It didn´t happen last year, it didn´t happen when Obama announced he had chosen Geithner, it didn´t happen when it became clear that the audacity of hope had morphed into the stupidity (some might say naivety) of hope.

    Instead of marching to Washington, take your savings away from those TBTE (too big to exist) bad banks, and deposit it at one or more small, local, transparent, less bad banks, and ask your friends to do the same (and their friends, and their friends, ..).

    Anybody who — after all the fraud that´s been revealed — still has an account at one of those TBTE and/or bailed out bad banks, is co-responsible for the continuation of the fraud.

  20. If we got rid of them, where would we go for our million-dollar board seats once we’re done screw| err serving the public?

  21. No one has mentioned the role the big banks play in covert economic “foreign policy.” Namely, destroying emerging economies and crippling other economies. How will the U.S. destroy the emerging Chinese economic threat without the big banks? No one wants to talk about the real reasons big banks exist, and Simon of all people should be aware of this.

  22. Hmmm… a website maybe, that lists credit unions by zipcode. Then a little viral PR. Transfer of the bulk of United States savings to small, local institutions within say 6 months? Anyone have a problem with this?

  23. .

    The posters on this E-list are _so_ smart, _so_
    well-informed! I would like for them to
    respond to the question: what does a sensible,
    socially beneficial financial sector consist
    of? If we could come to some agreement on
    that, we would be able to make some reasonable
    suggestions for possible restructuring and
    regulation. At present too many of us are
    running around yelling about the Awful Bankers,
    their Excessive Salaries, and Why Can’t the Gov’t
    Do Something.

    Best wishes,

    Alan McConnell in Silver Spring MD

    First, applause for putting your name to your words. Far too few Americans do.

    Second, from my perspective, a financial system that is both socially responsible and economically sound is a regional or local system. Credit unions come to mind, as do community banks. In this day and age, any bank ought to be able to provide many if not most of the services of a B of A or a Citi, since its all done by compuerts now, not by armies of clerks in a file basement somewhere. I say regional, because the business banking need of the desert Southwest do not necessarily match those of the still manufacturing heavy Northest, nor does the financial expertise.

    For that matter, i fyour financial regulators actually neforced the many lows already on the books, that would improve the situation immensely.

  24. No one?
    Yakkis, you have mentioned it, I have asked questions about it every now and then and we are definitely not no one – at least I insist on being somebody

    – on the other hand we do not have megaphones and those with the megaphones seem to prefer to keep quiet about it

    – I have been wondering from the beginning of this bail-out mania, if not worldwide entanglements i.e. foreign policy reasons are the real reasons for this inconsistent behaviour

    one way to check would be to find out the difference in importance between Bear Stearns and Lehman Brothers for worldwide money flows. I dimly remember that Lehman wasn’t as heavily interconnected.

    whether the reason is to keep China away from achieving dominance or whether the reason is to keep the holders of US debt from ganging up against the US or any other scenario would be for the experts on this blog to speculate about but most seem to see the US as still quite isolated while probably the down with the trade barriers globalisation craze has changed that quite a bit

  25. not ECONOMIC warfare – a struggle for overall dominance
    and in my book the sad story is you either have to stay dominant or you will be subdued
    or as I learned from her if you cannot afford to walk out your cards at the negotiating table are not good http://itc.conversationsnetwork.org/shows/detail3323.html

    so my first guess was and still is that the US has gotten itself so deep into globalization that it has lost in some or all cases the ability to walk out
    – just keep in mind that Deutsche Bank collected from AIG 12 or 13 bn of your taxpayers’ money – that’s just one foreign bank one knows about, then I have read some Swiss names and those are all who were in on the great gamble? or went the commodity rich countries flush with cash all through those “western” outfits? or maybe they were virtuous enough not to gamble at all? ;-)

  26. how many of you have loans/mortgages/debts at those banks which you’d rather leave now?

    I ask because our Volksbanken which are quite good with loans for small businesses and which also are about the last to take cash deposits from small businesses willingly at the same time put subtle and not so subtle pressure on their customers to keep their savings with them also

  27. Yakkis: ¨How will the U.S. destroy the emerging Chinese economic threat without the big banks?¨

    From this posting, as well as James´ posting earlier about PR-man Talbot talking point (´they are manageable´, while clearly they are not), as well as countless other blog postings, it is abundantly clear that they are not manageable, are way beyond the point of scale benefits, are detrimental (some might say even dangerous) to society, and really only exist to impress WashDC and get a bigger bonus for top management (size is part of the bonus formula).

    They might try to influence foreign policy, as do all big companies (like GE, IBM, Boeing).

    Today, the US would be in a much better position to compete with the emerged economies, if it had not been weakened so heavily by the TBTE banks and IB´s.

    Hence, also from a competition (or ´economic warfare´) point of view we are much better of with a lot of small to midsize, not TBTE, transparant banks.
    and without those TBTE, fraudulent bad banks.

  28. We need to go back to the days when interstate banking was illegal, in my opinion. When banks were actually located in the communities they served (or at least in the same states), they did not get so disconnected from the financial realities of life in those states. Bring back the McFadden Act! That would give us an easy way to break up the banks — all facilities in a certain state, and all deposits and loans related to those facilities or by people resident in those states (including credit card accounts), would go to a new bank owning those assets. And no single bank would be too big to fail.

    Won’t happen. Can’t happen. We’ve moved past the point where government is responsive to anything other than the corporate interests who bankroll its actors. We’ve achieved regulatory capture on a mass scale, in the end…

  29. Ms. Farrell needs to be beaten over the head with a history book:


    I’d like to hear more discussion about how the auto industry used the same tactics as the TBTF financial firms (Big -> Power -> Access -> Influence -> Bailout).

    Would the administration be more amenable to “bigness” regulation if it were related to non-financial industries? Or are there “benefits” to having rent-seeking companies in all sectors?

  30. I have been arguing against the too big banks long before this crisis, and while the too big banks were still standing up and considered as great big banks incapable of failing by most opining here. And so in this respect I believe I have earned myself the right to say, without anyone doubting my intentions, that our biggest problem is not the big banks but the big and uncontested regulator that is the Basel Committee, the direct responsible for the biggest regulatory failure ever.

    If you insist on covering the regulators backs or pushing your own political agendas, so be it, but truth is coming out, slowly but surely.

    For those of you who have had enough of me arguing the issue I recommend the reading of A. Blundell-Wignall. P. Atkinson “Origins of the financial crisis and requirements for reform”, Journal of Asian-Economics 2009. That article might emphasize problems somewhat different from what I do but it clearly establishes the direct Basel link to the current crisis.

    You can find the article here though it seems it has to be purchased.

    If you want to save yourself the money then read a not so different precursor to the article at:

    Click to access 41942872.pdf

  31. I suspect we are feeding and training our own sumo banks to get into the ring with China’s and Europe’s sumo banks for the throwdown of the millennium.

    And no, I’m not entirely joking (wish I were).

  32. This comment has nothing to do with this post, I just have no other way to contact James or Simon.

    Both of you have talked extensively about financial innovation. Here’s another example that just feels wrong – especially when the FDIC is trying to raise more money to sure up its fund. There are “structured products” being offered where the purchaser has guaranteed principal over some time period, lets say 3 or 5 years, and yet participates in the performance of a stock index, or a basket of foreign currencies or oil prices or any other hedgable index / commodity. I don’t want to discuss the benefits of the investment in and of itself, that’s been done here. What is troubling to me as a citizen (but not professionally as I am licensed to sell these things) is that many of these instruments are being offered by banks and structured as CD’s giving them FDIC protection. This is just plain wrong. This is the eqivelent to offering FDIC protection to a leveraged bear market index fund for example. Isn’t this a place Sheila Bair could unload some liabilities? Is this really they type of thing the FDIC was created to protect?

  33. I wish you were, too but I am afraid the sumo image is one of the possible scenarios – but why is the international angle so little reported on?
    because if it were described in detail the pitchforks would come up? because one of the possible scenarios is that a huge sell-out of American valuables has been pulled through while everybody danced to the tune “all the world is constantly getting richer”

  34. “Did they go from poorer to richer?

    No, they burned it all. They squandered it in a corporate- and government-organized “consumer” orgy. They dreamt it away in bubbles.”

    It happened so smoothly nobody noticed that while house prices and food prices and fuel prices were outpacing wage increases, luxury items kept coming down in price to make you feel like your meager paycheck was actually able to support your family.

  35. Most things die when they get too big — little things are more nimble and start to outperform them. It will happen again.

  36. We’re too mobile, when you change states you have to change banks, too. I don’t mind opening new accounts when I move, but then I don’t move much at all. ;^)

  37. But how easy is it to get CIA operatives and other economic hit men to work in legitimate businesses?

  38. At the end of every decade the big banks have been at the vanguard of world economic crises. In the 1980s it was Latin America and Japan. In the 1990s it was the smaller Asian economies. In the 2000s it is….?

  39. In other words, it is precisely because they are detrimental to various societies and communities that they are so valuable. It’s not that everyone who works for them is a sort of vermin (these people become refugees like Yves Smith and Michael Hudson, who try to expose them), but it doesn’t hurt a bit if you have the morals of a crustacean.

  40. another American mystery for me …

    – we have states too and things tend to be very different from state to state (ask a Bavarian and a Rhinelander or even a neighboring it Hessian or better don’t) but switching banks because I move??? I’d guess even the strictly regional Volksbanken would pass me on to their sister bank without fuss unless of course I would do my business online and then all I’d have to do would be to tell them my new address – as I can draw money from automats free of charge with a Visa Card in lots of EU-countries I could probably even move to those countries without having to bother about a new bank account.

    sorry, but if you’d know the media bombardement I live under that everything is better in America you would understand my amazement that it is not EVERYthing – the amount our journalists are mis-informing us shocks me again and again

  41. Economic warfare is what Al Qaida is waging against the west. We are losing, in case anyone hasn’t noticed.

  42. maybe you are right about the morals one must have but what about patriotism, love of home country? to hell with that I want to keep my morals intact?

    – after all there was the considerable number of British writers who spied and did intelligence work for their government during ww2 and I think during ww1 also

    – i.e. the real problem seems to be to me to find out how to decide when it is a good cause

  43. could very well be in one shape or another – maybe Osama bin Laden has long returned to Saudi Arabia ??? ;-)

    – but seriously I keep wondering why very very rarely a sheikh crops up somewhere – Russians crop up in the more entertaining sections of the London Times but rarely a sheikh – on the other hand it is said that London is an Arab capital – why aren’t they in the news then? don’t they go out?

  44. Thanks Chas, I sure respect Simon for his ability and courage. The post is my frustration showing through.

    There are undoubtedly many folk with fixit goals in mind who actually have something going. Maybe a common website or linkage set would coalesce information of such action? This fixit tsunami gathering size and momentum can convince and hearten Washingtom people to take action?

    This is definitely not my forte but this site has advanced my understanding of the issue.

    Thank you everybody.

  45. If you think owning four or five vacation homes around the world constitutes serious wealth at this point in history, you need to recalibrate. Look for people with ten or twelve of them, all staffed and ready for the owner and his family to move in at a moment’s notice in response to a serious political or economic crisis. Look for those households to have close ties with the local dictator or political hierarchy. Look for private jets, helicopters and inconspicuously armored vehicles. Look for ownership of factories, research groups and other economic units in those same countries.

    Find some of those and try revealing their names. You won’t get far.

  46. It is critically important to separate the “benefits” of size. Notably, there are two:

    1) Economies of scale

    2) International competitiveness

    It is quite likely that, in a general context, banks are far beyond the size where they have hit diminishing returns for economies of scale. In other words, the whole world would be better off if the whole world limited size of banks.

    The issue of international _competitiveness_ is entirely different. The question here is whether a single country would be better off if that country unilaterally restricted banking size while the rest of the world did not – and the notion of “better off” includes the notion of economic/military security (i.e. control over the domestic economy).

    In that sense, an individual country may opportunistically seek advantage by subsidizing their banks – and make no mistake that allowing national banks to grow in size to the point where they are TBTF is an implicit subsidy. This is because large banks, with an implied national backstop because they are “systemically important”, will be able to get credit (e.g. sell bonds) at a lower rate because they are enjoying a subsidized and asymmetric risk/reward proposition. Because of the intense competitiveness of finance, and the limited domain of real competition (rates, service, and what else?), subsidized risk = subsidized cost of business = market share gains.

    In this context, the real defense of large banks is a defense of a deliberate trade policy in which countries identify geopolitically “important” sectors, and target them with subsidies. The US has – clearly – identified finance as a geopolitically important sector, and given it favorable treatment. Given the status of the US dollar internationally, this may be a better explanation of the real meaning behind “benefits of size”.

    That’s not to say this strategy will not backfire eventually. Indeed, it may have already backfired – not only have we suffered the downside of covering excessive lending risk, but owning the reserve currency has also created a multi-decade cycle of dollar overvaluation due to currency exports that have effectively subsidized overconsumption and underproduction in the US. (As the Euro cuts into the Dollar’s share of foreign currency reserves, it will get to experience more of that albatross…)

  47. Oh please! There are no “advantages” for the society as the banks get larger! What bullshit! And the utter arrogance to mouth such crap astounds me. They should be broken up.
    Not only that but any and all monies that they have stolen from the American people should be returned, and that includes the bonuses that those thieves received.

  48. Good comment Silke. Did you see the post where new graduates conversed concerning how to commence a banking career? No morals, at least few principles inferred. We are left to interpret their position as, how can I get my snout in the trough? That is personal gain is the alpha and omega?

    A difficulty surely lies where we insist morals, principles are purely a matter of personal opinion. History is replete with examples of principled people who followed tyrants. No external navigation and unsurprisingly the law of entropy is in force! Maybe we should all be boning up on thriving in chaos?

    Let us cut to the chase and state our basis for a moral position or admit that we allow no acceptable base external to our own opinion. I suggest this is the key issue and indeed CSF. There is just NO accepted base on which to construct our shared, principled moral belief system.

    Therefore on what authority do we criticize the TBTF players and their Washington colleagues whilst others admire them?

  49. I’m still not hearing a credible argument that the benefits of TBTF (i.e. international competitiveness) outweigh the social cost of TBTF (i.e. disenfranchisement / state-capture).

  50. “It is already abundantly clear that the White House cannot control our big banks.”

    What if the Executive branch uses its big stick—the U. S. Dept. of Justice. I can remember when the Dept. of Justice spent a decade pursuing an anti-trust lawsuit ending in the 1984 breakup of AT&T. AT&T lost 20-30% of its value and no one cried a tear. And as far as I can recall AT&T never took us to the brink of an economic abyss.

  51. Smartest, most proactive suggestion I’ve read in months. Credit unions, typically owned by their members, provide all or most of the services/products as the TBTF banks, but without the toxicity. Mine, NuUnion (formerly State Employees CU of Michigan) pays 4.5% interest on checking accts if you make 14 debit card purchases (on which there is no fee charged the user).

  52. People are not marching on Washington DC because the people who are being shafted by Wall Street are too busy working 2-3 jobs to go protest. Also, they have no money to travel.

  53. I remember a decade where the U.S. Department of Justice spent a decade pursuing microsoft for its browser (IE) integration, and losing because the incoming politician was paid off by MS.

  54. It is important to emphasize common interest in opposing the giant banks.

    Most people — Republicans, Democrats, liberals, conservatives, rich, poor — do not and are not benefiting from this concentration of money and power in the hands of these banks. Quite the opposite.

    So again, opponents must emphasize the huge and probably growing dollar cost. If the government borrows trillions of dollars to subsidize a few giant banks, where is this money, the real resources that it represents, coming from? Everybody else.

    The more clearly and specifically this case is made, the easier it will be to build a broad and strong base to oppose and overturn the policies.



  55. Thank you Yakkis. I was going to mention MS. These past “antitrust” actions sure look petty in retrospect. It is clear that AT&T and Microsoft execs didn’t have the ear (read:speed dial) of Treasury, the Fed, Barney Frank and Chris Dodd. Now the best the gov’t seems willing to do is limit exec salaries. Whoopity dooo.

  56. “Therefore on what authority do we criticize the TBTF players and their Washington colleagues whilst others admire them?”

    don’t do unto your neighbour what you don’t want to be done onto you?

    I am a not religious but I think this is part of a lot of religions/moral codes the world over and has been for millenia
    the problem of course then is to decide whom you consider a neighbour and so it goes on and on and on
    and so there will always be murky areas but going then back listening to your gut, remembering what you really value in life might help you keeping away from excesses

    and as to the young graduates in a way they are to be pitied, to chose a job for money without regard to what makes you tick in a satiating way – neither power nor money alone without an extra benefit seem to have the ability to satiate

    lots of people have to make a living with non-satisfying jobs but that those who have choices should just go for where they get the greatest adrenalin kicks baffles me

  57. I am not arguing that they do… not at all.

    I am saying that the reason the current Administration is defending big banks is _not_ because they really believe in economies of scale for big finance. Rather, it’s because they believe that supporting big banks is necessary because _other_ countries are supporting big banks. It is, in effect, a trade policy.

    I am not arguing they are correct that the strategic (economic and political) value of supporting that sector against a de factor trade subsidy outweighs the immense costs.

  58. And, to be clear, I am not arguing that the stategic importance motivation is the real reason (rather than the quite obvious capture of the political process). It is simply the best (real) argument they have.

  59. “This administration deliberately chose to be very nice to the biggest banks and to the people who run them.”

    That statement would accurately apply to every administration since Franklin Roosevelt, with Reagan and Clinton fighting for first place.

  60. SNORT! Yeah, let’s not forget that Clinton signed both Riegle-Neal, which repealed the McFadden Act prohibition against interstate banking which prevented any bank from becoming “too big to fail”, and the Gramm-Leach-Bliley Act which repealed Glass-Steagall and allowed banks to speculate with depositor money. It’s not shocking that Alan Greenspan calls Bill Clinton “the best Republican president of the past forty years”.

  61. “I haven’t found even an assertion that our largest banks should get bigger, in absolute size or relative to the economy, let alone any facts or relevant empirical evidence. If I have missed a convincing quantification for “bigness also has its benefits,” please draw that to my attention.”

    Read the work of Olliver Williamson, who was just awarded the 2009 Nobel Prize in economics for his thesis that bigger is inherently better (because it is more “efficient”). Note that while banks aren’t singled out, they are included in the general proposition. Such related issues as the financial and political power that comes with market control and regulatory capture while profitable but dangerous gambling is insured by TBFT status are not included in his analyses.

  62. During the Hoover administration part of the Great Depression, the president advocated the repeal of the Sherman Anti-Trust Act as an appropriate tool to combat the shrinking economy (you know, the standard Republican position that government interference with the unrestrained growth and control of big business is the cause of all economic problems).

  63. One alternative being suggested by the OECD with respect of the too big bank organizations is to force them to create a non-operating holding company which would allow for a legal separation in different affiliates, of their different activities. This to me sounds like a very good initial step so as to gain a better understanding of what is going on.

  64. If big banks (and the like) are a risk, then increase the FDIC insurance rates – a lot – based on size. Should be enough to discourage over-growth, and offset costs incurred by those same risks.

    Is there an optimal size range? How would we figure this?

  65. “what does a sensible,
    socially beneficial financial sector consist

    Go back 30 years. The commercial banking system managed by the fed was small banks that could only loan in the county they were in. We need that system back again. It will come back as a different breed of financial services when the present system becomes unmanageable. It will be a long, painful, and possibly devastating process. The present setup is destined to fail. There is no double its next breakdown will be to big to be recoverable. The alternative will be to start over with local banks.

  66. You may recall that Judge Jackson had ruled to split Microsoft into two companies, an operating system and an application company. What MS bought what a change in venue to a favorable judge. She threw out Jackson’s finding and left MS in a position to keep on cheating the public.

  67. Hi.I have been reading your comments and not one of you including Mr.Jhonson have said anything about abolishing the fed and it’s private ownerships ability to print money.Ithougt that in America the Republic only the congress had the right to print money.Give that right back to the people and all is saved.
    American dream-GREED goes from institutions all the way down to average Joe.It is 3 M’s me,mine, more.That is America today.
    Every CEO of every company financial or other should have a working model of a guillotine on their desk.
    Enlighten me please.

  68. That kinda reminds me of what Yakkis said about big banks being instruments of “covert economic foreign policy”.

    Maybe they’re like weapons of financial mass destruction. The US need to have some because other countries have some too.

    I think we should all feel safer that they exist. If the Chinese don’t behave, we’ll unleash Goldman Sachs upon them.

  69. Just tonight, Nobama announced that he is won’t be able to tax offshore corporate income either… Two days before the FBAR reporting is required.

    Nobama said this during the campaign:

    And yet, even as most American citizens and businesses meet these responsibilities, there are others who are shirking theirs. And many are aided and abetted by a broken tax system, written by well-connected lobbyists on behalf of well-heeled interests and individuals. It’s a tax code full of corporate loopholes that makes it perfectly legal for companies to avoid paying their fair share. It’s a tax code that makes it all too easy for a number — a small number of individuals and companies to abuse overseas tax havens to avoid paying any taxes at all. And it’s a tax code that says you should pay lower taxes if you create a job in Bangalore, India, than if you create one in Buffalo, New York.

  70. I wish they would. Then they could take their giant blood-sucking squid tentacles out of us for a few minutes.

  71. Just in case you’re honestly asking and not just a troll, here is why no honest economist knowledgeable of economic history suggests eliminating the Federal Reserve. If you want to comment further on this subject, do so at that URL, voodoo economics (bizarre conspiracy theories, gold buggery, etc.) is off-topic for this blog which is about serious economics and its application to the real world whereas I’m perfectly happy to educate people in economic fundamentals over on my own blog :).

  72. (1) Efficient in what way? Here is a simple example: I go into a hospital and give my new insurance info; they proceed to bill my old insurer. I go into a small auto glass repair shop, and they always bill my correct insurer. I don’t know who is more efficient (though I can speculate), but I sure as heck know who is more effective. As another example: Microsoft (~90K emps, plus tens of thousands of contractors)- it is the most chaotic organization I have ever worked for…it is absolutely no surprise to me why they can’t do much very well…a good example of “efficiencies” from a large org…very efficient at creating chaos. LOL.

    (2) If bigger is better, let’s just have one bank, one auto company, one supermarket chain, etc. Hmmm…seems like Communism to me – well, if owned/run by the government. That’s exactly where we are headed. Capitalism be gone! Forget innovation. Forget value. Everyone gets to be a cog! Yahoo.

  73. It rally is not about limiting b ank size, but rather bank scope. If we return to a form of Glass Steagle which prohibits banks from doing business in areas other than stanndard banking (checking, savings, loans), and take them out of all of the ancillary activities, the problem may well cure itself, assuming reasonable regulation. it is their forays into all of the crossover activities which got them and therefore us into trouble.

  74. That is exactly what the OECD is saying when proposing the non-operating holding company to split up the big banks in their different components. For instance in the case of a Deutsche Bank normal bank loans are only 15 percent of their assets.

  75. -If the Chinese don’t behave, we’ll unleash Goldman Sachs upon them.-

    The PRC still pretty much has a closed finance sector. That is a big reason for their success.

  76. Yakkis has a point… consider the US embargo of Iran, in which one of the more effective implements was curtailment of business with an Iranian bank:


    NPR had a storyt his morning which interviewed Iranian businessmen alleging that even while the US was implementing the embargo, Swiss/French/Italian banks (who would have guessed?) were sending representatives to Iran to help Iranian businessmen work-around the US embargo through European relationships and shell companies.

    Moreover, it’s important to also recognize that the _single most effective tool_ at opposing international terrorism has been going after their funding, and in doing so the US has much more leverage with US based banks than (for example) Swiss based banks.

    So why would a sitting President give up such powerful foreign diplomacy tools if he thinks he can control those tools and make them do his bidding?

    The key argument, really, is whether the administration really can keep their hounds under control. Recent history (as in, the past 12 months) seems to disagree. The next question is whether the US and EU can come to some terms about working together to control their finance sectors (particularly in the realm of making them serve national security interests). On that dimension, I’m afraid, the recent history of our European allies is not at all supportive.

    So from the Administration’s perspective, they aren’t willing to give up those weapons. But as SJ notes, they far underestimate the danger of keeping those weapons around, especially since they are inherently hostile to the political party currently in power.

  77. (short version of a longer comment I’m not going to retype)

    I agree with Yakkis…

    The US embargo of Iran, and especially of Sepah Bank, is a good example of why the US may think big banks are strategically important.


    Even with big banks that are globally dominant, enforcing such sanctions has only imposed a modest cost on Iran – largely because of European usage of this as an opportunity to expand market share.

    The gamble on the Administration’s part is that they can control this beast. In other words, I will concede that banks are useful on the stage of international diplomacy and national security – indeed, constricting financing may have been our most successful effort at hindering Al Qaida – far more effective than the Iraq War. The question is whether we really can ever safely contain, control, and use big banks without them turning on us.

    per SJ’s “bite the hand” comment, I suspect the answer is no. But that does leave us in an international bind, because clearly our European counterparts do not always share our foreign policy objectives.

    Even so, the cost to our economy of the political capture and the impediments this has created to writing decent regulation (even with such an intense media spotlight) is really damning evidence.

  78. The size of the TBTF banks do not provide any social or economic benefit. They cost all of us. They compete unfairly with those smaller institutions that are able to survive. They gouge consumers with fees, penalties and fiscally dangerous products. Perhaps most importantly, they dominate the political and regulatory process, corrupting government from top to bottom. This corrupting influence will only grow more dangerous if, as I strongly suspect, the Supreme Court frees them, without reasonable limitations, to spend government-subsidized profits to elect government officials who put the interests of such institutions before the interests of the public. In other words, these institutions pose a threat not just to our economy but to our democrat way of life. It is never too soon to break them up.

  79. “Advantages of size, economies of scale were not viewed as convincing arguments to prevent break-up of Standard Oil or AT&T.”

    AT&T is an interesting comparison. Issues of size and monopoly aside, the breakup was quite controversial at the time because AT&T was a generally admired company.
    However: if AT&T had not been broken up, we would not have the internet today. For all their quality as a phone company, they froze innovation much as does Microsoft today.
    The moral is: “too big” is a bad thing and not always for reasons you know at the time. Clearly, the big banks are now doing harm to this country and for that reason they should be done away with.

  80. So in light of how nothing seems to be changing in how this dysfunctional system is run, it seems that we’ll be in for another bubble. Since it looks like an unavoidable outcome, I gotta ask: how quick will it take for the bubble to build and pop this time? They seem to be getting faster and faster over time, so will it take yet less time to cycle on this round?

  81. how about monopolism (or three or four or five dimension monopoly-ism) or how about (financial) warlordism
    I don’t believe in the return of the old evils mankind is too creative for that, trust us to come up with something unexpected but I would bet on it to be evil

  82. However, the Fed could be a true Central Bank – like the Bank of Canada – owned by the Treasury. Ouch, that would hurt the banking sector.

    Of course, the only two Presidents who dared to print their own currency (Lincoln and Kennedy) were shot.

    Just because you’re paranoid doesn’t mean they aren’t after you.

  83. And this is because the “advantages,” to the extent that they exist (which is often not the case) are outweighed by numerous, cumulative disadvantages as these organizations grow and sprawl across widely diverse sources of escalating risk. For banks, I have extracted the efficiency ratio, ROE and ROA data over a substantial period of time, and there is nothing that demonstrates greater efficiency once a bank exceeds $500 billion in size; to the contrary, efficiency appears to deteriorate quite significantly (I say “appears” because there are many moving parts and comparison is difficult).
    I disagree with JCMoore’s comment, immediately below, because information-based businesses such as banking are dependent on enormous physical, human and technological resources for their operations and delivery, and this is where the diseconomies creep in.
    Simon Johnson is entirely right about his concerns.

  84. StatsGuy: “indeed, constricting financing may have been our most successful effort at hindering Al Qaida – far more effective than the Iraq War.”

    Not to get too far afield, but doing what they wanted us to do (get out of Saudi Arabia) probably had something to do with that. The Iraq War — really, wars, since we won the first one –, has probably done more than anything to fan the flames of jihad against the U. S., by providing a causus belli.

  85. wally: “However: if AT&T had not been broken up, we would not have the internet today. For all their quality as a phone company, they froze innovation much as does Microsoft today.”

    Actually, we had the internet at the time, in the form of the Arpanet. The innovation was accomplished by the gov’t and academia. Only later did the Arpanet morph into the Internet, and that happened mainly through the creativity of the users.

  86. isn’t it strange that at the same time when corporations split up like crazy under the mantra of concentrating on core business according to you banks operated under the according to McKinsey et al advice regarded as long long out of fashion mantra of diversity

    if banks start to stop diversifying and concentrate on core businesses will then corporations start to diversify and go on a buying spree to replace all their sold off parts?
    hyperactive management really takes care that a worker’s life stays interesting

  87. Stats Guy
    I fully agree on your take on us Europeans*)
    “clearly our European counterparts do not always share our foreign policy objectives”
    but unfortunately we are not the only ones – I recently read that the Chinese have started supplying Iran with Gasoline thus weakening the probably most effective handle the US had to date

    *) the sad story is that even though we have one currency and proudly call ourselves Europeans (well some of us at least) in reality we are nothing like a conglomeration of small states which I doubt is in any position to weather periods of non-prosperity successfully i.e. hold together under stress – and as to banking I would bet on each bank being its own so if the French would restrain the Germans would take over and if they both would restrain banks in another of the 27? states would only be too willing to fill the gap, if necessary by banding together – they are able to regulate the curve a banana is allowed to have in Brussels but other than that they have no handle and right now it seems all the checks supposed to keep countries’ dealings with their finances in order to keep the Euro stable will drown – how about the Swiss Franks? if only as of Polanski financiers hadn’t to fear that they also might be extradited

  88. Min
    I was opposed to going into Iraq as well as into Afghanistan (the boots on the ground parts) but that’s maybe because I’ve read too much history and I do not believe that things change all that much just because you have some effective new weaponry and strategies (maybe you and we have been left in peace because Iraq provided the more exciting battle ground?)

    but to think that anything you do or don’t do is strengthening or weakening jihad I do not buy for the same reason as above – if the US, the West, started to become more angelic than angels these days jihad would find other reasons for attacks, for complaints, for demands
    – once a fanatic idea a mental madness has gripped the imagination of a sufficient number of people there is probably very little you can do than try to contain it – appeasement does not work – There are people who tell of incidents where “they” acted rationally and then the logic goes if they are capable of rational actions than we can deal – I wish I could believe that everybody capable of rational action makes a reliable partner in negotiations – in my book there is just no connection between the two

  89. I fully understand that the U.S. has been consumed with anti-socialism paranoia ever since the concept was first proposed in the 19th Century. No rational discussion of the costs and benefits, relative efficiencies, and so forth between public and private ownership of anything and between planned and market economies has been possible since. Capitalism and national defense have simply become buzzwords designed to stifle discussion and promote agendas without honestly revealing them. In spite of all this, I would temerously ask the following question: If you did have just one bank, one auto company, supermarket chain, etc., would you really want it to be owned by capitalists (with an organizational model that is responsible only to its owners, for whom the only meaningful goal is to maximize their own profits) or by the government (with an organizational model that is responsible to a majority of the voters and whose goals and constraints are laid out in the Constitution)?

  90. There is nothing “temerously” with answering your question what is though somewhat “temerously” is to phrase the question in such clear cut terms, as if life was that easy.

    For a start I would put in doubt the quality of the decisions of the majority of voters as currently counted and in such a case I would at least give each child a vote (to be exercised by their mother or father) in order to put some breaks on the current baby-boomer dictatorship.


    SEPTEMBER 15 2009
    PEOPLE HAVE BEEN SAYING THAT THE US HAS HAD A, ” LOST DECADE” SINCE THE DOW JONES INDUSTRIAL ON SEPT 15, 1999 CLOSED AT 10801 AND TODAY, THE DOW CLOSED AT 9683 REPRESENTING -10% OVER THIS LAST DECADE, ( never mind that if you factor in the 25% loss in the value of the dollar, that makes this more of a 35% loss)

    OCTOBER 15 2009


  92. Hey Uncle Billy Cunctator,

    I am sorry, toobigtofail(TBTF) is just too much of a lie, and Tubbytuffs, is just a sweet word to describe a real evil that has perpetrated our country…here is what i think needs to be the new acronym, and i can only pray, in good ole fashion Southern style, that it catches on to help people know the real nature of that we are dealing with:

    see this to remember:

    And while you are at it, it may help to know what the grand puppetmaster (the privatley held federal reserve owners and all their agents (our elected officials) are up to:

  93. WE THE PEOPLE, OUR VOTE AND OUR VOTE IS THE SILVER BULLET…Simon is doing a great job getting the word out, and this blog is a very legitimate way of pulling back the veil on what has been a corrupt power machine since 1913, and before that, a much longer history…it is only this last BAILOUT that is not for the toobigtofail, but toobigto accept as a nation any longer–as Abe Lincoln said:

    “This country, with its institutions, belongs to the people who inhabit it. Whenever they shall grow weary of the existing government, they can excercise their constitutional right of amending it, or exercise their revolutionary right to overthrow it.”


  94. Hey Simon and James, will you please call the shots as they are and please stop calling the recipients of US TAX$$$’s TBTF, and instead, PLEASE call them BHB BLACKHOLEBANKS?

    Very truly,

    PS And as a reminder:

  95. Badtux’s Law: Any sufficiently long economics thread will inevitably attract a collection of gold bugs, conspiracy theorists, and general kooks to natter about their bizarre notions to the detriment of any serious reality-based discussions.

  96. Min, Bigger and Fewer is the culmination of Crony-

    Many liberals hoped vague and sexy Mr. Hope and Change was about positive reform. Oops! Too late. He is really more about asserting and expanding Democrat party power and control. Bigger banks controlled by the government mean a much greater market share of the economy controlled and influenced by the government. Who cares if they screw the consumer, the public and the economy? The media will spin it and blame it on Bush and the Rethugians. What matters is Power. Getting it and keeping it forever. That is what Obamacare, and Cap N’ trade are also all about, as well, btw.

    The big banks were O’s top three biggest contributors. Now those same big banks have gained about 20% in market share due to preferential treatment during his administration after feloniously causing much of our financial calamity.
    Gee, how’d that happen? The Savior whose was out to help the little guy, wouldn’t do that would he?

  97. Simon Sir,
    It would seem Mrs. Farrell’s ignorance stems from the fact she does not actually read papers and speeches by President’s and CEO’s of the Federal Reserves offices outside of Washington.
    I know both James Bullard of St. Louis and Thomas Hoenig of Kansas City Fed have both commented on ‘too-big-to-fail’ banks, which means in reality they are too big to exist.
    Luckily, it would seem James Kwak never had any interaction with Mrs. Farrell when he worked at McKinsey, otherwise he’d be a zombie like she is.
    If this is what a head of research for the government can say, God help us.

  98. the child voter scheme sounds really attractive but I wonder how long it would take Europe then to become very strongly muslim-influenced
    – we had enough trouble to get seize fires working after the protestants emerged and mind you it was far from finished after the 30 years’ war – it flashed up again and again and again albeit not as bloody and as devastating as way back then

  99. going all hyperbole is neither …

    analysis and adrenalin do not mix well
    ideally one has two hats and can easily switch from one to another … and tolerate being called a cynic from time to time

  100. Paul you describe another beautiful Catch 22

    how are you going to be able to do things for Hope and Change if you do not have the power to do it?

    the power game most of the time has been a dirty or at least not quite clean game, let’s assume Obama was sincere in his promises then we should pray that his Macchiavellian streak is well developped enough to enable him to impose his will – if he is lacking in ruthlessness not even the best intentions will help

  101. how about this?
    – the pompousing/ballooning of job titles maybe a minor factor but probably upholsters people’s yearning for grandeur and self-importance quite a bit – and feeling grand makes one in turn more willing to put one’s own judgment over everybody elses

    I’m worried about my unimpressive job title

    “I am a senior compliance manager in a big bank but my title is merely “controller”. Other people in my bank who do less senior jobs have much grandersounding titles.”

  102. Silke: I want to imply nothing stupid, Silke. A question of magnitude. Right now the huge scandal in France is one of (three) the Sarkozy’s son is pushed by his dad as head of EPAD, although he is a total failure at school, having just completed one year after high school in four years of applying himself. He is 23, and would replaced a 65 year old veteran politician as head of the development agency of what is the highest GDP financial district in Europe (yeap, including the City).

    Magnitude, keep in mind. For example, there was fascism in France, true, but it was developed on an entirely different magnitude by Hitler and his minions.

    More is different. There is no doubt that if Americans were of the same aggressive mentality as the French, the bank bonuses would not happen. The Netherlands, BTW, have cracked down.


  103. Patrice
    I agree on your take on magnitude – it matters and not only because of numbers but because something operating in bigger numbers may also generate quite unexpected results – chemists after all upgrade their lab results to the 50 kg or so level and so on until finally a factory is built adjusting the process on every step – so no disagreement there

    but insofar my point concerned magnitude it was magnitude of disclosure and there you must admit that the more statistics are out there the more one can draw conclusions from them or model general schemes or accusations on them and that leaves very much in the opaque those who do not disclose – if they want to come clean let them disclose equally generously and then they may claim to be holier but before that they better keep quiet whoever they are

    – the guy and the girl who used the US-statistics were far far from being US-friendly – they sounded like if scientist’s honour had allowed them to do it they would very happily have omitted that disclosure about the figures they concentrated on from their presentation
    btw besides magnitude geographic location and time it is done in matter greatly i.e. Kipling’s honest six plus “how much” added http://www.kipling.org.uk/poems_serving.htm
    Their names are What and Why and When
    And How and Where and Who.

    PS: if magnitude matters what about the difference between ruling and regulating over 300 instead of 60 millions?

  104. In EC101 we learn about the concept of minimum efficient scale, beyond which point a company experiences diseconomies of scale. It’s a pretty standard microeconomic concept but apparently one that the administration is unaware of or has dismissed. Perhaps they would share their research?

  105. Jay Gould quipped that the New York legislature was the “finest that money can buy”. The voice of experience. ;) But as he and the other Robber Barons showed, it does not take crony capitalism to result in bigger and fewer. Non-interference by gov’t will do.

    Laissez faire capitalism produces winners and losers. The winners get bigger, and use their market power to prevent or hinder competition. Large firms can drive out small firms out of business in a variety of ways. Failing that, they can buy them up, getting even bigger in the process. Yes, they also use political power, but that is not necessary.

    It is true that eventually large firms fail, unless they are bailed out. There is the main point where welfare capitalism really helps. But suppose that gov’t kept hands off. What that would mean is that we would have decades of monopolistic economies, punctuated by crises and depressions. (The failure of Jay Gould ushered in the long depression of the 1870s and 80s.) When large firms failed, we would have periods of free markets, until competition winnowed the herd and monopolies could take over again.

  106. I had a thought recently that, hopefully, will contribute to this thread. It has to do with the connection between executive compensation and firm size. As long as executives are given incentives to grow a company, then that is what they will do. Economies of scale, while often cited as justification, are not the objective.

    Please do not conclude from this that I advocate caps on executive compensation. Rather, I would seek ways of regulating incentives. There needs to be some way for the cost of risky behavior to be reflected in a P&L, a Balance Sheet, and a bonus check. We do this for insurance companies and banks, for instance, by requiring them to hold reserves to cover loss. Why not tie risk mitigation requirements to firm size or some other indication of risk (e.g. Beta, or troubled assets held, or default rates, market share, …..). If done correctly, there would be a tangible cost to growing larger that could only be offset if, in fact, economies of scale can be realized (a social benefit, given some limitations).

    I am skeptical that regulators can control behavior. In general, they are inevitably limited to closing barn doors long after the horses have left. Markets are, and should be, flexible, adaptable, and resourceful. Bureaucracies are, and always will be, rigid, slow, and fixated on the read-view mirror. Any set of prohibitions one might imagine will be circumvented eventually. Far better, in my estimation, to focus on incentives.

    Today, risk is externalized to shareholders and tax payers. Much better to internalize them as costs against earnings.

  107. Or, we could do exactly what bankers want us to do: give them full permission to blow all the reserves on hookers and blow!

    I know, it won’t fix the problem, but it’s far more likely to happen than any regulation any of us might suggest, it seems. :-/

  108. Before we march on Washington and appear as as critics without an objective understanding of the problem and possible solution, I suggest we distil the ideas posted by the many clever bankers offering their thoughts here. Incidentally I am not a banker and do not understand the intricacies of the mess.

    If critics approach the power wielders with a succinct and reasoned fix, we will receive more credibility rather than appearing to stand on various mountain tops and bewail the end of the world.

    Here follows what I think I have heard from the assembled wise folk. It is not meant to be exhaustive and may not even be remotely correct. However we all could build a worthwhile document. I surmise that our blog owners having such a tool in their armory will achieve more than present?

    Over to the clever folk:

    A: Global goals:
    1. Bank’s primary goal – to operate for:
    1.1 their community good
    1.2 stakeholders
    1.3 staff fair reward
    2. Mobilise and make capital prudently available to achieve …?
    3. Operate banks to minimise risk of failures.
    4. Global process guide for recovering failing or failed banks
    5. Guard against rewards for gambling mentality

    B: Problem statement:
    1. Basel II
    1.1 capital requirements rules based only on borrower scale and risk
    1.2 prudential achievements – optimal deployment of capital not mentioned
    1.3 rewards for size and immediate profit only
    2. TBTF banks (crisis detonators)
    3. Bank oligarchy (but not primary)
    4. Regulate derivatives
    5. Independent central banking
    6. Ensure overt separation of Banking and Government .
    7. Global reserve currency to be a basket-based index and not a national currency.

    C: Possible action required:
    1. Rewrite Basel II regulations in some way? (Pers to draft initial rewrite?) This need only be a meta statement with subject index
    2 Reduce TBTF banks (probably by restoring the separation between normal banking services and the merchant banking exotica?) Also by defining some scale limit and ensuring they are NOT TBTF? Legislation to ensure banks know what is their fate if they transgress!
    3. Banking oligarchs power limitation? – how?
    4. Regulating the derivatives market – how?

    Ok my friends, after you have picked yourselves up from rolling on the floor and emitting hysterical laughter, time to bell the cat. Else. return to mountaintop and demonstrate personal knowledge?

    I am confident we can achieve something worthwhile. Do I have any allies?

  109. Slip of two finger typing resulted in anonymous appelation previous. Yes, I am the poster child.

  110. notabanker, the below represents my own brainstorming session. I think you see things similarly to the way I do — we need to lay a new foundation. Your schematic focuses on these things: 1) banking (I assume you mean the narrow type) 2) Basel 3) Derivatives 4) Central banking 5) Global reserve currency 6) Relationship btw banks and government

    Since this is a treatment of finance at a global level, the mind boggles and seizes. Job 1 seems to be to scrap existing international entities like BIS, IMF, World Bank, and all the other junk that were brought to us by the bright fellows who carved up the world after WWII. There is a concerted effort underway to globalise currently. I don’t think we have to be afraid of globalisation, but we do need to worry about who’s driving it, and why. Perhaps we can wrest the new baby away from what appear to be murderous machiavellian sociopaths. I’ve poked around a bit, and am completely convinced that we have the brainpower and the resources to feed, clothe, shelter, provide medical care for, educate, and even entertain every living soul on the planet, and then some. What does it matter that we smooth out the “business cycles” and euthanize wolf-packs of hedge funds and arbitrageurs if people anywhere are suffering unnecesarily?

    A lot can be accomplished with a website, a debate and voting mechanism, and other internet goodies. Maybe a group of elders consisting of sociologists, experts on jurisprudence, economics {cack}, history, psychology, PR & Media, finance and banking {cack}, etc., would be helpful too. Even if academics or other pundits are currently “captured,” it shouldn’t be too tough a sell to get them involved, genuinely, in a plan to change the world, soon, for real.

    With any luck, thoughts will be clearer and less grandiose tomorrow.


    Excellent start for building consensus. This will be interesting as the 50 states descend into chaos, and national trade barriers continue to grow.


    Action plan, deadline, sense of urgency

    Preplanning: identify similar existing efforts, settle on scope of project, announcement of project and open invitation to participate.

    Phase 1) 1 month – concentrated brainstorming
    Phase 2) 1 month – selection of final action items for debate
    Phase 3) 1 month – open debate on each item, draft of proposal.
    Phase 4) 1 month – selection of individuals and/or organizations to mount PR campaign; anticipation of objections, resistance, and pushback.
    Phase 5) 2 months – dissemination of plan, final tweaks and formalization
    Phase 6) International referendum??

    Considerations: How many initial representatives from each country should participate? How do we vet? How do we prevent process from getting coopted? How can the whole process take place without being an affront, threat, to national sovereignties?

  111. Way back on Oct 13, I posted basically the same
    query, in this thread. My two postulates: Money
    is too important to be played with; and financial
    instruments must serve some social purpose.

    To that end, I suggest: banks should be tightly
    regulated a la Glass-Steagall, to insure that
    they are properly capitalized and use their
    funds for secured loans. And insurance companies
    should insure only tangible, real-world assets,
    like houses and ships. We can also consider
    insurance agains disasters: e.g. earthquakes,
    tornados, floods, etc.

    The rest should be abolished, no? No derivatives,
    no credit default swaps, no leveraging. And
    strict controls on the amount of inter-bank

    NB: we’re not going to get these things any time
    soon. But my idea, eloquently articulated by
    Anonymous is: work out a theory of what is
    desirable, so that we don’t, as Anon says, sit
    on mountaintops and yell imprecations.

    I don’t know if Messrs Johnson and Kwak read what
    we all post here. If they do, perhaps one of
    them will take up the challenge to frame a
    desirable(albeit capitalist) financial system
    that would abolish playing around with money,
    and ensure that only financial services offering
    some social service would be allowed.

    Best wishes to all,

    Alan McConnell, in Silver Spring MD

  112. It seems the TBTF’s have got away free and clear, leaving us to live with the mess and owe them forever.

    Maybe not!

    How about we immediately require Mark to market reinstatement. Immediately the banks have to reveal and eat their own poison. We seize them as major creditors, keep the normal banking services in operation and retain control until Basel III is in place.

    DERIVATIVES: we legislate that derivatives are only allowable if approved and subject to regulation.
    Unapproved derivatives are immediately unenforceable ontracts.
    Traders transgressing regulations are banned.

    Bankers can play ball or be rolled, it’s a free country!

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