By Simon Johnson
What is the basis for major policy decisions in the United States? Is it years of careful study, using the concentration of knowledge and expertise for which this country is known and respected around the world? Or is it some unfounded assertions, backed by no data at all?
At least in terms of the White House policy towards megabanks, it is currently “no discussion of data or facts, please”.
Speaking on the Lehrer NewsHour last week, Larry Summers said, with regard to the Brown-Kaufman SAFE banking act – which would restrict the size of our largest banks (putting them back to where they were a decade or so ago):
“Most observers who study this believe that to try to break banks up into a lot of little pieces would hurt our ability to serve large companies, and hurt the competitiveness of the United States.”
“But that’s not the important issue, they believe that it would actually make us less stable. Because the individual banks would be less diversified, and therefore at greater risk of failing because they wouldn’t have profits in one area to turn to when a different area got in trouble.
“And most observers believe that dealing with the simultaneous failure of many small institutions would actually generate more need for bailouts and reliance on taxpayers than the current economic environment.”
I’ve looked into these claims carefully and really cannot find any hard evidence supporting Summers’s position – and therefore US policy. To be sure, there have been assertions made along these lines by a few people.
But can the White House point to any published material or even publicly available analysis or data that is relevant to the questions at hand? How about work that has been presented to critical audiences, preferably with the entire discussion on the public record. I would be happy to be corrected on this – call me – but I can find nothing.
This is not about jumping through any kind of academic hoops – it is simply a question of whether this critical aspect of our public life is post-Enlightenment (i.e., we worry about the evidence) or stuck at the level of unfounded medieval assertion.
On the other side of the argument, I would submit the evidence reviewed in our book 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown, which – among other things – surveys the available literature, from both academics and practitioners. Read it for yourself – we wrote it for this moment and this issue. (Or ignore the book if you prefer; this would put you in good company at the top rungs of our society.)
“Most observers” agree with 13 Bankers on the need to reign in (and constrain the size of) our largest banks. We’ve presented this book and its findings to top lawyers, finance people, both more academic and completely practitioner. We’ve talked about it at length on Capitol Hill and with very experienced people who work or have worked throughout the financial system. We have also argued in detail with anyone who is close to the big banks – although, unfortunately, top executives and their representatives will not come out to debate in the open. The experts are overwhelmingly on board – except for those who work for the big banks.
I would not have a problem with the administration’s top officials saying, “we can’t take on the biggest banks because (a) they are too powerful in general, and (b) they would cut us off from the campaign contributions that we need for November.” This would at least be honest – and then we could discuss whether it makes sense as political tactics.
And if the most senior and experienced economic policymakers in the land wish to make their own assertions, unencumbered by the facts, then you can take a view regarding whether or not they have earned the right to be taken seriously. (By the way, “most observers” think we are very fair to Larry Summers in 13 Bankers; a significant minority think we are overly generous.)
But for the White House to make inaccurate claims regarding the views of “most observers” is the most obvious and cheapest sham.
Come out and have the discussion on its merits in public. Or just cut off debate in the Senate, through some sleazy backroom deal, and face the consequences.
The Baseline Scenario 
..oh gosh, Simon you are wunderful! (and there is no shameless audicity in plugging 13 Bankers as many times as it takes to screw in the light bulb in people’s heads and yes, I did catch that subtle phrasing of Mr. Summers on the news hour, too.)
Mr. Summers wrote:
“And most observers believe that dealing with the simultaneous failure of many small institutions would actually generate more need for bailouts..”
I prefer objective metrics over opinions of “observers” before I pull any financial triggers.
Mr. Summers also wrote:
“Blaming speculators as a response to financial crisis goes back at least to the Greeks. It’s almost always the wrong response.
In this age of electronic money, investors are no longer seduced by a financial ‘dance of a thousand veils.’ Only hard and accurate information on reserves, current accounts, and monetary and fiscal conditions will keep capital from fleeing precipitously at the first sign of trouble.
There are children who are working in textile businesses in Asia who would be prostitutes on the streets if they did not have those jobs.”
Breaking up or downsizing the banks must be done if the republic is to survive. It is vital. One cannot be laid back about this or criticize the people have led and who are leading the battle to inform the public.
Thank you Mr. Johnson for pushing so hard on this matter. The citizen “observers” are more upset over this issue than anything. They actually understand many elements in this fight.
I believe the Republicans have a chance to score by taking all their support and putting it behind Brown-Kaufman and pointing out to voters in November how phony the Democrats were to promote the Dodd bill.
Well, I admit I am shameless. An undisguised plug from the audacious peanut gallery. I little something humorous from our man Larry Summers.
http://grahambrokethemold.blogspot.com/2010/05/day-you-never-thought-would-come.html
Probblay not an original thoughts… but I would be more than happy to contribute to a fund to provide a copy of 13 Bankers to every Congressman, Senator, and key Executive Branch people – like Larry Summers, Tim Geithner, etc.
Not that they cannot afford to buy their own and some/many probably have, but still…
Maybe Simon and James would autograph each copy and provide their phone number and email address. Offer to do the autograph in person as you deliver the books.
Pete
Breaking up or downsizing the banks must be done if the republic is to survive.
That’s the primary fact.
Even if “trickle down” hadn’t been proven a thousand times false, and even if there were evidence that finance rackets produce some value (but thanks to Simon and James among others we know they don’t), none of that would change the political imperative.
Democracy and freedom itself are impossible while living under the thumb of protection rackets (I’d aim that at the supporters of the health racketeering bill as well). So even if these rackets produced something, even if they weren’t purely parasitic and destructive, we’d still need to destroy them.
It’s first of all a freedom issue.
As far as I am aware, the third argument of the worse effects of many simultaneous small bank failures goes back to the Great Depression. The systemic effects of this are well documented in the literature. Of course this happened before deposit insurance and the FDIC. However the evidence that the failure of many small banks can have systemic effects is available.
The argument about competitiveness of the financial sector is clear cut in my opinion. If Deutsche Bank is too big too fail and thus can borrow cheaply as a new type of GSE, this hurts smaller banks in the U.S. If this ultimately leads to U.S. banks being driven out of certain markets, an argument can be made that it hurts U.S. competitivenss.
The second point is the hardest to defend in my opinion. Any smart risk manager should be able to hedge any exposure with a balance sheet of $200bn behind her.
Please keep pushing the Volcker Rule. It is becoming part of common parlance, it is simple in concept, it is gaining traction, and it may very well be the trigger sufficient for accomplishing the downsizing needed.
Why Obama even keeps Summers around is the bigger question in my mind. Perhaps it does make sense as some would say, to hold your friends close, but your enemies even closer. For any private entity such as a bank to become that large that it directly influences policy of a sovereign nation is unthinkable, yet that is exactly where we are and it must end now before it is too late to right the system. We either return to a form of Glass-Steagall on steroids or the banks are forced to be broken up into smaller entities.
It is outrageous to think that these banks who make up the bulk of a private banking cartel known as the Federal Reserve have gained this power and is probably giving both Andrew Jackson as well as Jefferson reason to turn over in their graves.
The masses realize the obvious. That Washington and those we have elected to do the peoples business is corrupted by a never ending stream of cash from a powerful banking lobby going to friends of Wall Street in government, but there has always been a remedy.
I was just about to toss my cookies this weekend after reading the words of the great oracle from Omaha regarding his friends at Goldman. Warren Buffet and Charlie Munger have come out recently in defense of Goldman.
Warren holds quite a bit of Goldman Sachs stock. And all he and Charlie have shown just as Summers has, is that once you strip away the trappings and the masks, the ornamentation and the legend, what you are left with is someone who is willing to lie down with pigs when the money is right. So the question is not what kind of man Warren Buffet is or Larry Summers for that matter, but rather, what is their price? But Buffet and the too big to fail crowd have hopefully met their match this time. Larry Summers is no friend of the American people and it’s about time Obama realized it, cut his losses and began giving serious thought to the mid term elections.
People like Summers, Geithner and the Greenspan’s and Rubin’s of the world have only one thing to concern themselves with. That being how to maintain total control of the financial system. Many people have begun to awaken from years of apathy and are willing to hold their elected officials to account. Hopefully, total transparency and down sizing these banks will remain as the true objective of Congress. If not, the remedy I spoke of remains a viable option as stated by Lincoln during his first inaugural speech.
“This country, with its institutions, belongs to the people who inhabit it. Whenever they shall grow weary of the existing government, they can exercise their CONSTITUTIONAL right of amending it, or their REVOLUTIONARY right to dismember or overthrow it”…..A. Lincoln
When the tide goes out, we indeed see who is naked, and who is not. And it is not a pretty picture.
I think anyone running for Congress has already collected signatures, registered, and primary season is well underway. I think the Party Faithful, who know what Good Things their well-lobbied party can bring home in the way of bacon, have chosen their candidates consistent with the kind of bacon that has been brought. The beneficiaries are there to nominate and promote the next generation of puppets. I think … leave that word, to make a point.
To say well, we vote in November, that is a kind of cop-out. We used to say they vote in the USSR, but there is only one party; you vote among the party. So too in this country, both “parties” are faces or fronts for moneyed interests.
I am not a party operative, so that leaves me with the Revolution alternative. Barbara, have you thought this through?
“But can the White House point to any published material or even publicly available analysis or data that is relevant to the questions at hand? How about work that has been presented to critical audiences, preferably with the entire discussion on the public record. I would be happy to be corrected on this – call me – but I can find nothing.”
If you want an academic look at the other side of the argument, try Ross Levine, Thorsten Beck, and Asli Demirguc-Kunt. I believe they’ve been writing about the concentration of banking systems and financial crises for some time.
http://www.risk.net/risk-magazine/news/1601927/breaking-banks-increase-instability-research
(I’m not defending their position, just giving you some names.)
Summers’ comment of “Most observers who study this believe …” sounds like the first cousin of what Faux News does on a regular basis, i.e. preface a personal and/or company opinion with “Some people say …”
If you took an honest poll of the average American, “most observers” would like to see all Wall Street executives tarred and feathered.
I do not know why you give the arrogant Summers the benefit of any doubt. He and Geithner are Tweedledum and Tweedledee in just about every respect, except that Geithner is not fat.
After Obama is gone from the political scene, will the only trace of him be his Cheshire Cat smile?
Breaking up the large banks would return us to the boring old banking days of 1940-1980. Can we go now please?
i’m a big fan of this blog and of simon and james’ thinking on these subjects, as well as the fact that they’re actually trying to do something to help move things in the right direction.
BUT, i’m pretty turned off by all of the references to 13 Bankers. for me, the frequency and nature of the references seem increasingly as an attempt to sell copies of the book, for profit.
if the primary purpose of the book is to inform and promote a more positive policy agenda, i’d be much more receptive if the book was made available for free (perhaps in digital format); or even if the sales were somehow structured only to recapture expenses/costs, rather than for profit.
at a minimum, the “informational” and “sales” aspects of the book seem muddled in the current approach.
Listen to our Canadian friend; Van Morrison’s “Too Long in Exile” album, especially “Big Time Operators” and check back.
Larry Summers is the epitome of what the Germans call a ‘Fachidiot’, literally an “expert idiot” who knows all sorts of facts about a given subject yet is clueless about how they interact with the real world.
It is to Obama’s shame that he gave this intellectual disaster a second run at grinding the gears of our national economic transmission.
We all know what’s going on here. Let’s just get on with it and call Summers out as the lying shill that he is.
Simon
In addition to Larry Summers “spin” you should be aware that a former Fed economist and industry strategist, Alford, has floated the notion of limiting bank size in relation to markets instead of GDP Why dismantling too big to fail firms makes economic sense
Clearly a market-based definition allows banks to argue that they are small players in international markets so Alford’s title is misleading if not outright deceptive. But his argument is a clever way to co-opt the “break up the banks” effort.
Right now the industry is dead set against ANY limits but if limits look inevitable, then look for the industry to push for MARKET-based limits.
Rubin’s cube (Rubin, Summers, Geithner, Bernanke) is the first mistake Obama made in the financial game. I was hoping to see Volcker at the head, or at least behind the scenes. Is it too late? I’m returning ’13’ to the local LIB today. I liked especially your definitions and explanations throughout for us amateurs.
Gordon, please don’t insult idiots. Some of my best friends are idiots. Summers knows what he is doing.
“…an “expert idiot” who knows all sorts of facts about a given subject yet is clueless about how they interact with the real world.”
Precisely! I have another term for Summers’ sort:
Arrogant Savants
Yes I have Ellen and was waiting for you. It was a revolution that created our new world experiment and it may well require yet another to save it just as Jackson had. This can actually be done if the right people began looking in the right places for the right answers. We need to go back to 1871 when the Republic of the United States became a corporation. The answers are in our not too distant history. The corporations objectives were furthered through amendment when both the Fed as well as the IRS were created.
Point being, what was done can also be undone, but the will to move forward has always been what was lacking combined with a populace that has been dumbed down for years that suffers from apathy. At this point I think I’ll re-watch Seven Days In May.
This is really about style, and to the extent it distracts from the authors’ message, probably deserves consideration. Simon & James wouldn’t want to alienate their supporters. Duh!
I’ll gladly take boring as what we have now is simply a death by a thousand cuts and banking at these elite levels are doing absolutely nothing for me or the economy as a whole.
Hahaha. Ditto that!….:)
“Whenever something happens, Summers said, Plan A is form a committee. Plan B is to encourage industry to voluntarily devise better practices. Plan C is to call for more transparency. And then, eventually, Plan D is ‘do something.'”
What is also hilarious is this sounds like something you’d read in “Dilbert” – putting the “do something” last. Seriously, it’s sounds like someone making a joke of business practices because it’s exactly the formula to avoid a problem until it blows up…
Imagine raising children like that – and that’s what the market is – children posing as adults.
Simon….”I would not have a problem with the administration’s top officials saying, “we can’t take on the biggest banks because (a) they are too powerful in general, and (b) they would cut us off from the campaign contributions that we need for November.” This would at least be honest – and then we could discuss whether it makes sense as political tactics”.
Since when does a bank become too powerful? If this is a legitimate observation, we’re in deep doo doo. Why can’t people see the obvious 800 pound gorilla in the room? To whom do these mega banks owe their allegiance? over the last fifty or so years it seems to be to the mother of all banks, the Federal Reserve.
I wonder how many average Americans realize that the Federal Reserve can enter into agreements with foreign central banks and foreign governments, and the GAO is prohibited from auditing or even seeing these agreements.
Why should a government-established agency, whose police force has federal law enforcement powers, and whose notes have legal tender status in this country, be allowed to enter into agreements with foreign powers and foreign banking institutions with no oversight? Particularly when hundreds of billions of dollars of currency swaps have been announced and implemented, the Fed’s negotiations with the European Central Bank, the Bank of International Settlements, and other institutions should face increased scrutiny, most especially because of their significant effect on foreign policy.
If the State Department were able to do this, it would be characterized as a rogue agency and brought to heel, and if a private individual did this he might face prosecution under the Logan Act, yet the Fed avoids both fates. This is the cloth from which Larry Summers garments are sewn and it’s about time someone told the emperor he’s buck naked and way past his sell by date.
Well, thank God Larry Summers didn’t design the Internet; if he had, we’d have ended up with one ginormous, hugely powerful node. Kind of like the Death Star in ‘Star Wars’: one direct hit, and that system is knocked out.
God forbid that we have a network of banks, in the same decentralized way that we have a network of Internet protocols and sub-systems.
The Internet was designed for resilience; knock out one node and the rest will cover the damage and keep the system functioning.
Now, the Internet deals with ‘flows’ of information.
And banks deal with ‘flows’… oh, wait…
I’ll repeat myself: thank God Larry Summers did not design the Internet.
If he had, we’d be toast.
I think Simon and James are more concerned that the book is read, and it’s points popularized, than that they sell a few more copies.
If all this blog is about is Geithner Summers and
(the attempt at) financial regulation, than this
comment is Very Off Topic.
But if the general subject is: how the Rich are
beating up on the average American, then I beg
to point out a danger from a mile or so down
the road. I refer to Pete Peterson’s up to now
successful effort to get the Powers-That-Be all
steamed up about THE DEFICIT.
We’ve got Mr Peterson’s Committee, and we even
have Obama’s semi-official Committee, bipartisanly
cochaired by Erskine Bowles and Alan Simpson. In
the name of the HORRIBLE DEFICIT they are going
to fix Medicare, Medicaid, Social Security, and
perhaps our new health care system. I heard
Leslie Stahl feed these guys leading questions on
C-Span the other day, and my blood did not know
whether to boil or freeze.
I suspect that Messrs J and K read at least some
of these Replies. I hope they soon will be motivated
to write about the Peterson-Obama attack on what
little safety net the American public enjoys. Then
we can discuss this issue as well.
Sorry for the disturbance!
Alan McConnell, in Silver Spring MD
That quote… wow. Reading Summers say that makes my Raving TeaParty Anti-Government friends all sound completely rational.
;-)
http://www.dilbert.com/
Actually he’s Irish :-). I heard a rare interview with him recently. He spent most of the the time bitterly complaining how he was financially “ripped-off” by music corporations over the years, sad.
Re: @ Barbara___You mentioned Jefferson,and Jackson,but Lincoln gave his life,as did JFK ,”Bucking the Oligarchy”. It is also wise…not to forget that the historian’s commissioned too paint the raw facts in opaque pastels behind the storm clouds…masking a sad tale regarding America’s past, were well compensated!
“The whole problem with the world is that fools and fanatics are always so certain of themselves, but wiser people so full of doubts.”
Bertrand Russell (1872 – 1970)
Alan McConnell wrote:
“We’ve got Mr Peterson’s Committee, and we even
have Obama’s semi-official Committee, bipartisanly
cochaired by…”
“A committee is a cul-de-sac down which ideas are lured and then quietly strangled.”
Sir Barnett Cocks (1907 – 1989)
http://www.charlierose.com/view/interview/10839
January 29, 2010. An hour of Charlie Rose talking with Lawrence Summers in Davos, Switzerland. (Note too his last Friday interview with Blankfein.)
After hearing this Summers interview months back, the Newshour piece was not such a shock to me.
From the Davos interview I chiefly got an emotional impression — sort of the framework for the sort of things the man says. Look for yourself. But I think the man is almost learning a few things from this crisis. Dare we hope? No…
also Peterson’s relatively new foundation is spending funds to raise the alarms about the deficit and unfunded mandates. If only he didn’t get a tax deduction for the billion dollars setting the thing up. We could use his money to plug deficits and unfunded mandates.
it’s all fashion and smaller will be coming into style again. twenty years ago bank consolidation was the answer- especially for those that survived the late eighties-early nineties. The survivors were more than happy to sell out and golf happily ever after. In a couple of years, when the sums of the parts are greater than the whole banks, will spin themselves out into smaller, more discreet entities. Merrill will be back, maybe even Bear.
Let’s observe the top “20 Banks” in our current (Jan/2010) “Global Financial Universe” (I’ll only put their NYSE Ticker Symbols):RBS__$2.1tn.; DB__ $2.15tn.;__ BCS $2.97tn.; BNPQY.PK $2.48tn.(?);__Credit Agricole Group,France 2.07tn.(?);__UBS $1.3tn.;__JPM $2.03tn.;__SCGLY.PK SPO $1.57tn.(?);__BAC $2.22tn.;__UniCredit Italy $0.93tn.(?);__GS $0.85tn.;HSBC $2.36tn.;__MTU $1.99tn.;__C $1.86tn.;__MS $0.73tn.;__ING,NV $1.88tn.;__CCB (?)$0.00;__WFC $1.24tn.;__Credit Suisse $1.91tn.(?)Note: the total assets are random…____Conclusion: There is no reason for America’s TBTF “Not” to be cut down to size,period! The basis for their (Banks) adament arbitrage holds no water – in fact, the empirical data suggest the contrary. The first proposal is as says; America’s individual banks, “not to be no larger than 2% (currently~ $14tn=$~$0.30tn.) of GDP. The second (final) proposal is not for any individual bank to hold no-more than 10% of the nations total (this could be a big problem for the FDIC to get their hnads around?) deposits. It will take approximately three to four years to wind-down said entities (crossing our fingers that nothing precipitates this?). Finally the Republicans see political gain going this route as do the liberal left. The momentum is gaining steam,thanks to Simon,and James! PS. What we should be cautious about – the banks floating the idea of foreignors encroaching on our homeland (ex.Japan in the 80’s,etc.,etc.) to poach the feeble (US banking System) emasculated behemoths,whereas these nefarious parasites could have already anticipated this alternative,and ready at a moments notice,…written into the legislative language, a subtle subliminal message of come one come all? Thanks Simon,and James,and please keep on “Digging for America’S Sake”
You’re forgetting the old saying about how the ability to not understand an issue is increased if your salary depends on your not understanding it.
They wouldn’t read the book.
Simon, James, I know you guys are seriously busy with the book, and trying to, you know, save the world, but I have a humble request / suggestion.
It has been an awful long time time since we had a “Current Baseline Scenario” post. (Oct 09 unless I missed one.) I know 13 Bankers is like an extended version of one, but given the current political and economic state of the world, I think it would be timely. And I miss them.
Thanks for keeping up the pressure/thought.
Which is why I have such trouble with the echo-chamber of the bizniz/bankster friendly press repeating how if we only reined in Freddie and Fannie, none of this would have happened. It was Clinton’s policy of giving those poor people loans they couldn’t afford that caused the world to nearly end. (You can read it here):
http://www.theatlantic.com/business/archive/2010/05/3-huge-problems-financial-reform-ignores/39830/
Lawrence J. White, a finance professor at New York University, said it made no sense to overhaul financial regulation without addressing the future of federal housing policy. He said he was trying to find the strongest possible words to describe the omission of Fannie Mae and Freddie Mac from the legislation.
“It’s outrageous,” he finally said.
This is also a Republican complaint. Fannie and Freddie played a huge role in helping to overheat the U.S. mortgage market. Until those agencies experience some fundamental change in policy and procedures, it’s hard to see how another housing disaster won’t occur again in the future. There’s no attempt at any reform for these companies in either of Congress’ financial regulation proposals.
Sandi here: As long as the idea that this can all be blamed on poor folks has traction, it will be that much harder to get congress to do any real reform.
Of course, we know YOU, Bondgirl, of all people would never defend big banks. Hence your attempts to post comments like the above and other ambiguous remarks to make the pro-regulation, anti-concentration of power in large banks’ hands sharks, to chase after blood clots on a hook.
Many people fall for your cute little “song and dance” (including Coffman and Kwak, which shows their kindness of heart, but a good deal of naivete). I for one, do not.
On topic or not, Alan, you are dead on the money! This meme has been jumped on faster than you can blink. It is VERY troubling, and if history repeats, cause very severe, long-term damage to a recovery that I think is much more fragile than we’ve been told. BWTFDIK? I’m merely a cog in their money wheel.
>Many people have begun to awaken from years of apathy and are willing to hold their elected officials to account.
Yes, people are awake, but they hardly agree on the solution. The most common proposal is to return to the ’80s. The libertarian / tea bagger crowd wants to return to 1880 and Simon/James (and those who agree with them) want to return to 1980. Quite the difference, yes?
Ah yes, 1871, before the Clean Air Act, Clean Water Act, Pure Food and Drug Act, and child labor laws. And a man was free to smack his wife with no worry of backtalk or consequences. Those were the good old days!
1980 good; 1880 bad.
this is why i abadoned obama right after he got inaugurated. it was clear then what was coming in the future, and the future is here. more of the same
Professor Johnson,
Rogoff would be another academic to whom you could respond.
http://www.project-syndicate.org/commentary/rogoff68/English
Ted K,
I am not being ambiguous at all. I am highly sympathetic with Professor Johnson’s political economy argument and have written a great deal on the topic. What I do disagree with is the notion that there is not any academic support for the administration’s position at all.
I am sure I am not the only person here who finds your personal attacks tedious. Grow up.
I will not vote for a Democrat while Larry Summers is in the White House.
I have voted the Democratic party ticket my whole adult life over thirty years.
Massachusetts, here we come!
James/Simon, better put Ted on a short leash but do promise him a biscuit if he keeps his tail-wagging exuberance in check…
“We have met the enemy and he is us”.
Pogo author, Walt Kelly,
I like that!
@saucymugwump: I think you missed the point completely! I idea is that we must go back to 1871 to fully understand how our nation has evovled into the corporate nation it is. There was no suggestion that a return to policies of 1871 would be appropriate, as you seem to think was the meaning.
My experience with music corporations in the ’60s, suggests that they may well have been the guys the current Wall Streeters emulated.
What you call a “lying shill” the CEOs of the major corporations call a “captain of industry”. The problem is that they get a large part of the population to a) think the same thing and b) think they really could be the same thing one day.
I would note that what the White House supports amongst three specific amendments relating to the reform due to be debated beginning tomorrow will tell us much about whether it truly supports reform, or just likes to pay lip service to the term while allowing the details to broadly support the status quo. The first and most obvious is the Brown-Kaufman amendment about which BS has so eloquently written in support. The second is the Blanche Lincoln amendment to prohibit institutions proclaiming “bankhood” to be involved in derivatives and to require their open trading and reserving on exchanges. And the third, which in my estimation is at least as important as the other two, and perhaps more, is the amendment requiring both audit of and full transparency of the FED, which has, interestingly, been co-sponsored by more Republicans than Democrats and, to my knowledge, has not (as with the other two) been yet demonized by the Wall Street Banksters. This was examined at length on the Dylan Ratigan show (he is perhaps the single most knowledgeable member of the media on either side of the issues), and he had on both Alan Grayson of the House (D-FL) and Ron Paul (R-TX, but really libertarian by any stretch), and they were very candid about its likelihood of passage. Without all three of these measures, we will assume that the Wall Street oligarchy has a virtual lock on Congressional action through its lobbyists and campaign contributions.
As a side note, if Charlie Crist of Florida is successful in his bid (or appears to be so during his campaign) as an Independent candidate, we may being seeing the political playing field tilt in ways that it hasn’t in decades. I believe that any candidate who swears off corporate support will win in the near term. We are all sick of living in a plutocracy where the taxpayer is trampled.
I love that quote, one which I use often. Thank you. It largely describes mankind’s history on this planet.
Yeah, it’s kind of like putting the CIA in charge of banking and deeming it “black ops.” No, wait, that is the actual truth, just not the CIA, but only those letters are missing. The FED is the CIA (the Central Ignorance Agency, where they ignore us for their friends both here and abroad). One can’t help but feel, somewhere in the pit of their stomach, that the infamous Bilderberg Group is somehow linked into all of this amazing obfuscation. Ask yourself: What secret (in government) was ever, I mean EVER, constructive. The CIA has proven to be a completely evil group over the years and a very good argument could be made for it being responsible for far more bad than good, certainly in terms of foreign policy and American image.
Clinton has owned up to his own cupritude, and Greenspan as well. Now it’s time for the rest of the horde of deceivers (read members of the plutocracy) to confess their role in the fiasco called deregulation. It’s almost like we are still living in the bad side of Wonderland, and can’t find the real Tea Party, but are, instead, finding vast numbers of Mad Hatters making insane proclamations and selling (that snake oil) them as a cure. If history is doomed to repeat itself, I am, daily feeling more hamsteresque in my worldview. It’s Groundhog Day memorialized in demonic ways.
CC, c’mon, they will sell lots of copies, regardless. They just don’t want to have to continuously repeat arguments already made in its pages. And, what’s wrong with authors trying to sell their books? That is way off the issues and unnecessary to even say.
I read the article and must say that mere size is really less the issue than several other factors. That having been said, there are just not enough adjustments that can be made to offset the non-financial factors which may have led to this conclusion, and, although I haven’t read the paper, I bet Simon has. Based on what I read, it is really impossible for me to be convinced of anything. And, we don’t even know what the motivating factor was for the study to be undertaken, or who sponsored or paid for it, really.
Not only that, but our largest banks (the TBTF’s) are not “banks” in the traditional sense, but financial conglomerates which conduct banking as a hobby, and call themselves banks only to get any advantage that bankhood gives them. So, we have a comparison between say apples and water buffalo (not oranges, in this case). All that having been said, I really would want Simon’s take on the study as well as that of, say, Stiglitz, Black, Ferguson, etal.
Hello,
I sent this email in slightly different versions to my Senators and my Congressperson basically telling them to propose and support the amendments in the finance bill to reinstate Glass Steagall and the Uptick rule. Perhaps my email can serve as a template for folks to write to their elected representatives. After reading it again after sending it I wound up cleaning it up a little. It probably needs to be cleaned up more; I hope I got the point across:
Hello Senator,
According to the hill newspaper:
http://thehill.com/blogs/blog-briefing-room/news/95427-warner-senate-could-vote-to-reinstate-glass-steagall
>>>>A bipartisan group of senators have pushed for the reinstatement of Glass-Steagall, which would force banks to separate their commercial and investment activities. <<<<>>>”Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions.”[1]
The rule went into effect in 1938 and was removed when Rule 201 Regulation SHO became effective in 2007. In 2009, the reintroduction of the uptick rule was widely debated, and proposals for a form of its reintroduction by the SEC went into a public comment period on 2009-04-08.<<<<
All this simply does is put a speed limit on short selling. One of the problems with the meltdown was the rapid short selling of these institutions. This accelerated the drop in share prices. So even if you had a systematic regulator, it probably would not have been able to react fast enough before the share price of the institution in question traded to zero.
Please do not be taken in by the arguments of the mega finance corporations. When the CEO of a mega financial corporation is stating that "USA institutions will be less competitive than their foreign counterparts" what they are really saying is "Gee with less revenue streams, I won't make as much in bonus money anymore." If it means that Lloyd Blankfein has to make 2 million in bonus instead of 6 million in bonus, I think society can cope with that "tragedy." Secondly, how competitive were these institutions in 2008? Weren't they begging the U.S. taxpayer to bail them out? The way to mitigate the competitiveness argument is to mandate that foreign banks who want a commercial charter and want to do business in the USA will have to have the same structure as U.S. banks. And, USA commercial banks can't have foreign subsidiaries or joint ventures that are engaging in the risky activities that brought down the economy.
Also, they will say that the institutions that got in trouble were standalone investment banks and not the ones that had a commercial banking arm. But, remember the argument made by the investment banks in 2004 when they requested permission by the SEC to increase their leverage ratios. They stated that competitors like Citibank and JP Morgan had greater access to capital because their commercial banking arms were collecting FDIC deposits and money from the Federal Funds window and were using this money to engage in competition with the investment banks. As a result, the leverage of the investment banks exploded when the SEC relaxed the rules. This is another example of the failure in leaving something in the hands of regulator without having basic principles of risk separation codified into law.
In conclusion, I request that you offer or support amendments that will reinstate the principles embodied in the old Glass-Steagall Act and to demand that the SEC reinstate the uptick rule. Even with these proposals imposed, nobody can guarantee that future crises won't occur, but all we can do is make them less frequent, less damaging and much more difficult to develop.
Regards,
For some reason my post got truncated. Hopefully this second one will work
Hello,
I sent this email in slightly different versions to my Senators and my Congressperson basically telling them to propose and support the amendments in the finance bill to reinstate Glass Steagall and the Uptick rule. Perhaps my email can serve as a template for folks to write to their elected representatives. After reading it again after sending it I wound up cleaning it up a little. It probably needs to be cleaned up more; I hope I got the point across:
Hello Senator,
According to the hill newspaper:
http://thehill.com/blogs/blog-briefing-room/news/95427-warner-senate-could-vote-to-reinstate-glass-steagall
>>>>A bipartisan group of senators have pushed for the reinstatement of Glass-Steagall, which would force banks to separate their commercial and investment activities. <<<<>>>”Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions.”[1]
The rule went into effect in 1938 and was removed when Rule 201 Regulation SHO became effective in 2007. In 2009, the reintroduction of the uptick rule was widely debated, and proposals for a form of its reintroduction by the SEC went into a public comment period on 2009-04-08.<<<<
All this simply does is put a speed limit on short selling. One of the problems with the meltdown was the rapid short selling of these institutions. This accelerated the drop in share prices. So even if you had a systematic regulator, it probably would not have been able to react fast enough before the share price of the institution in question traded to zero.
Please do not be taken in by the arguments of the mega finance corporations. When the CEO of a mega financial corporation is stating that "USA institutions will be less competitive than their foreign counterparts" what they are really saying is "Gee with less revenue streams, I won't make as much in bonus money anymore." If it means that Lloyd Blankfein has to make 2 million in bonus instead of 6 million in bonus, I think society can cope with that "tragedy." Secondly, how competitive were these institutions in 2008? Weren't they begging the U.S. taxpayer to bail them out? The way to mitigate the competitiveness argument is to mandate that foreign banks who want a commercial charter and want to do business in the USA will have to have the same structure as U.S. banks. And, USA commercial banks can't have foreign subsidiaries or joint ventures that are engaging in the risky activities that brought down the economy.
Also, they will say that the institutions that got in trouble were standalone investment banks and not the ones that had a commercial banking arm. But, remember the argument made by the investment banks in 2004 when they requested permission by the SEC to increase their leverage ratios. They stated that competitors like Citibank and JP Morgan had greater access to capital because their commercial banking arms were collecting FDIC deposits and money from the Federal Funds window and were using this money to engage in competition with the investment banks. As a result, the leverage of the investment banks exploded when the SEC relaxed the rules. This is another example of the failure in leaving something in the hands of regulator without having basic principles of risk separation codified into law.
In conclusion, I request that you offer or support amendments that will reinstate the principles embodied in the old Glass-Steagall Act and to demand that the SEC reinstate the uptick rule. Even with these proposals imposed, nobody can guarantee that future crises won't occur, but all we can do is make them less frequent, less damaging and much more difficult to develop.
Regards,
Let’s try it again
Hello,
I sent this email in slightly different versions to my Senators and my Congressperson basically telling them to propose and support the amendments in the finance bill to reinstate Glass Steagall and the Uptick rule. Perhaps my email can serve as a template for folks to write to their elected representatives. After reading it again after sending it I wound up cleaning it up a little. It probably needs to be cleaned up more; I hope I got the point across:
Hello Senator,
According to the hill newspaper:
http://thehill.com/blogs/blog-briefing-room/news/95427-warner-senate-could-vote-to-reinstate-glass-steagall
“A bipartisan group of senators have pushed for the reinstatement of Glass-Steagall, which would force banks to separate their commercial and investment activities.”
I really like this idea. I think if you can separate the risk and inter-connectivity of institutions and place a 3-5 year holding period for FDIC insured and Federal Reserve member banks can securitize them and have the bank only securitize say 80% of the loan, it can go along way towards containing the downside of extremely risky activities within one sector of the finance world and not have it spill over into the bread and butter of main street financing activities. Furthermore, there would be no need to increase the restrictions on the amount of capital banks can lend out because you would have banned them from participating in risky activities.
I think it is absurd that JP Morgan Chase (BTW I do think Jamie Dimon is one of the best CEOS in the country and if we could have cloned him and put the clones in charge of the other institutions we would not have had this credit crisis) can take FDIC insured deposits, borrow from the Federal Funds window and be able to mix those funds with underwriting, derivatives trading, proprietary trading and extremely risky activities. If they want this privilege then JP Morgan needs to spin off its Chase bank unit into a completely separate entity and Citibank needs to spin off Smith Barney Salomon in a similar fashion. The same thing should happen to BOFA, and other institutions. These things were done in the 1930s.
It is because the same institutions that were involved or connected by agreements and trades that went sour in the risky part of finance were also involved in the boring plain vanilla part of finance, (lines of credit, working capital loans, commercial mortgages, leases etc.) the government had to bail them out.
I think it is a mistake to put all our eggs in the basket of a super systematic regulator or hoping that there are CEOs of the caliber of Jamie Dimon out there. Let’s make life easier for these people by separating risk in its appropriate corporate structures and limiting or monitoring the connectivity among these various risk pools.
With this separation, it makes regulating finance from a systematic risk perspective easier. And, if an investment bank goes belly up because it made risky bets, the damage can be limited to only one section of finance and not bleed into other parts of the economy. You could probably allow the traditional bankruptcy process to take hold in this situation.
This doesn’t mean that a commercial bank should be always banned from partaking in the derivatives market. If they need to be involved for the purpose of hedging interest rate and credit risk of their loan portfolio, it should be allowed, but heavily monitored. However, this insurance could also be similar to the type of coverage a traditional credit insurer gives to a company’s account receivables (This is requested by asset based lenders and factors).
Also, you should lobby the SEC to reinstate the uptick rule. Here is a description from wikipedia:
“Rule 10a-1(a)(1) provided that, subject to certain exceptions, a listed security may be sold short (A) at a price above the price at which the immediately preceding sale was effected (plus tick), or (B) at the last sale price if it is higher than the last different price (zero-plus tick). Short sales were not permitted on minus ticks or zero-minus ticks, subject to narrow exceptions.”[1]
The rule went into effect in 1938 and was removed when Rule 201 Regulation SHO became effective in 2007. In 2009, the reintroduction of the uptick rule was widely debated, and proposals for a form of its reintroduction by the SEC went into a public comment period on 2009-04-08.”
All this simply does is put a speed limit on short selling. One of the problems with the meltdown was the rapid short selling of these institutions. This accelerated the drop in share prices. So even if you had a systematic regulator, it probably would not have been able to react fast enough before the share price of the institution in question traded to zero.
Please do not be taken in by the arguments of the mega finance corporations. When the CEO of a mega financial corporation is stating that “USA institutions will be less competitive than their foreign counterparts” what they are really saying is “Gee with less revenue streams, I won’t make as much in bonus money anymore.” If it means that Lloyd Blankfein has to make 2 million in bonus instead of 6 million in bonus, I think society can cope with that “tragedy.” Secondly, how competitive were these institutions in 2008? Weren’t they begging the U.S. taxpayer to bail them out? The way to mitigate the competitiveness argument is to mandate that foreign banks who want a commercial charter and want to do business in the USA will have to have the same structure as U.S. banks. And, USA commercial banks can’t have foreign subsidiaries or joint ventures that are engaging in the risky activities that brought down the economy.
Also, they will say that the institutions that got in trouble were standalone investment banks and not the ones that had a commercial banking arm. But, remember the argument made by the investment banks in 2004 when they requested permission by the SEC to increase their leverage ratios. They stated that competitors like Citibank and JP Morgan had greater access to capital because their commercial banking arms were collecting FDIC deposits and money from the Federal Funds window and were using this money to engage in competition with the investment banks. As a result, the leverage of the investment banks exploded when the SEC relaxed the rules. This is another example of the failure in leaving something in the hands of regulator without having basic principles of risk separation codified into law.
In conclusion, I request that you offer or support amendments that will reinstate the principles embodied in the old Glass-Steagall Act and to demand that the SEC reinstate the uptick rule. Even with these proposals imposed, nobody can guarantee that future crises won’t occur, but all we can do is make them less frequent, less damaging and much more difficult to develop.
Regards,
@Barbara: Is there a particular event(s) of 1871 that you are referring to?
Bravo! from a Sr. Banker.
Bondgirl,
Academic huh?? Would you like to share with us who are the sponsors of risk.net and who its audience is??? Or have you conveniently gone brain dead at the appropriate moment again????
The truth though is that it was “most observers” (which includes Simon Johnson) who got us into this mess, and so frankly I not care an iota about Simon Johnson phrasing the challenge in terms of number of observers for or against.
Meanwhile we now have the US Senate debating 1370 pages of financial reform which does not even once mention the Basel Committee and this even though, for instance, when on April 28 2004 the SEC allowed the investment banks to dangerously increase their leverage, it did so by stating that “the consolidated computations of allowable capital and risk allowances [be] prepared in a form that is consistent with the Basel Standards”.
What got us here was mostly the regulatory hubris of thinking that, in a world with so many different risks, everything would be fine and dandy if we just let some credit rating agencies determine default risks and then gave the banks great incentives, by means of different capital requirements, to follow those opinions.
If we cannot see the above, much less correct it, it really doesn’t matter whether the banks are too big to fail or too small to follow, we’ll still end up in a very wrong place sooner or later.
Simon,
Halfway down you wrote: “….on the need to reign in (and constrain the size of) our largest banks….”
I think the term you were looking for was “rein in” (as in “rein in the horses”) rather than “reign in” (reign: to exercise the power of a sovereign)
Correct me if I’m rusty on my history, but wasn’t the fed originally allowed to come in to existence when a cadre of bankers convinced the government it could eliminate or at least smooth out the boom/bust cycle gold was prone to? Obviously it doesn’t do it, but if that was the argument for it (as I’ve heard) then why do we allow such control of the public money supply to remain in the hands of an unsupervised failed institution?
Very interesting article: concentration (3 firm & index) is correlated with stability, but not significantly, if you look at large developed economies (G-10). Moral hazard means deposit insurance but not too-big-to-fail. What I couldn’t see from my cursory read was whether the model could distinguish synchronized, contagious crises from isolated ones. Sometimes who started it is important.
Empirical golf clap for bond girl!
Thanks for the gentle dope slap Rickk. The Irish and Tories have a history that plays into this narrative as carping demon says.
“But that’s not the important issue, they believe that it would actually make us less stable. Because the individual banks would be less diversified, and therefore at greater risk of failing because they wouldn’t have profits in one area to turn to when a different area got in trouble”
well, isn’t this the responsibility of the companies then? How about if they don’t properly manage their business, they suffer serious fines and if they are in a more dangerous line of banking, they have stricter rules governing what they can and can’t do. What he is saying is that the mega banks get to use insured deposits, taxpayer funds basically, to gamble with and cover losses.
The Fed has the economic policy portfolio, is the Peterson Institute going after the Fed? What adjustment is required for the loss of 8.5 million jobs and tax receipts engineered by the Fed?
“…they believe that it would actually make us less stable. Because the individual banks would be less diversified….”
Summers statements like these make it painfully clear that he is making stuff up as he goes along to serve his pre-determined conclusion. It is trivially false that mere size provides a stabilizing buffer. For example, so and so can have one million shares in one company or one million shares in one million companies. Mere size has nothing to do with it.
I would guess that Summers, like many economists, is fond of analogies, since the mathematics of economics is actually quite weak. (First, real economic systems, as should by now be all too clear, are radically non-linear, which is why major players like Goldman Sachs jealously guard their masters of computational methods. Second, the simplifications economists routinely champion are, in the real world, gross over-simplifications, throwing the baby out with the bath water.)
The analogy Summers tacitly relies upon is that with greater size, there is greater inertia. But then the analogy is a little too apt. Greater size results in less innovation, less agility, less flexibility to respond to change or the unexpected.
(How’s that paragraph for mixing metaphors?!)
The thing is, Summers (and Geithner, Bernanke, Paulson, Congress and Obama) like big banks. Big Is Beautiful! Having big financial institutions in the economic world is like having big guns, big bombs, big ships in the military. We can make others cower. Never mind that, again pursuing an analogy, there are a great many examples from history of the smaller, more agile foe, outdoing the bigger. Of course, Summers & Co. are hoping for an economic blitzkrieg — large and lightning fast.