Everyone realizes that we have to do something about "too big to fail." But there are two fundamentally different paths: one threatens the very existence of the billionaire bailout society and the other makes it permanent.
The obvious way to end "too big to fail" is to break up large financial institutions so that they are "small enough to fail." Paul Volker, not a radical by any means, argues for this. Even Alan Greenspan -- the very personification of the financial establishment -- agrees.
But to do so threatens the elite status of insiders at giant institutions like Goldman Sachs, JP Morgan Chase and Morgan Stanley. They make their billions from the combination of government welfare and their enormous, market-distorting size. Right this moment we are still bailing them out through a series of subsidies that go well beyond TARP.
Also, there are far fewer large financial institutions left in the marketplace which means that the remaining giants have near-monopoly pricing power. But most importantly everyone knows that we won't let them fail. That gives them access to cheaper capital -- they don't have to pay the risk premium other borrowers have to pay because you and I, through Uncle Sam, are implicit cosigners on the downside of the deal. And of course, they have excessive political muscle.
For those of you that believe financial institutions have the very best talent and therefore deserve the very best pay, take a look at Why Do Bankers Make So Much Money?"" by Rick Bookstaber. Here's one memorable passage:
"But I don't buy the notion that there are so many who have the level of talent that justifies tens and even hundreds of millions in compensation. I think this level of compensation, and the notion of talent behind it, is the result of the inherent uncertainty in the financial enterprise, one that makes it very difficult to assess talent. Indeed, I think the invocations of talent for money producers in finance are akin to those that, in times past, were set aside for the mystical powers of saints and witches."
Treasury Secretary Geithner doesn't want a radical departure from that witches' brew. He argues that it's possible to prevent the next meltdown by setting up a new watchdog council of regulators and by increased regulations on the large institutions that are designated (in secret, mind you) as too big to fail. He hopes that the next meltdown can be avoided by monitoring them closely, requiring more capital reserves, and by prohibiting excessive leverage. And if they go under Geithner wants the large institutions to be assessed to pay for the bailouts, after the fact. (Why not before the fact? Geithner thinks they would view it as insurance and gamble even more.)
Sadly, this would make bailouts a permanent feature of our financial system. It would guarantee the perpetuation of our billionaire bailout society for generations to come. (See "Breaking out of the Billionaire Bailout Society" on
But aren't we being too hard on the regulatory approach? Shouldn't we give it a chance? Well, we should if we want to guarantee employment for every Wall Street lawyer and financial engineer. Because there will be untold billions to be made by coming up with financial products and exceptions that skirt the rules and regulations. It will be the equivalent of trying to catch rum runners during prohibition. The net result will be even more multi-million dollar bonuses.
And none of these new fantasy finance scams will lead to finding employment for the 29 million who are jobless or underemployed -- the very people who were crushed under the last great wave of financial engineering.
We're headed this way because our political leaders are afraid to do what Teddy Roosevelt did more than a century ago. At that time the super-wealthy and their "trusts" were viewed negatively. Roosevelt, riding on the crest of resentment, dissolved 44 trusts. President Taft continued the policies and broke up another ninety. Even though Roosevelt and Taft were pro-corporate Republicans, they saw that companies like Standard Oil had an iron grip on our economy and social order far beyond what could be tolerated.
Today, our large financial institutions have an even a tighter grip. But our political establishment is afraid to break them up. If Roosevelt or Taft were around today, they'd probably get the same treatment as back-benchers like Dennis Kucinich.
It's not often that we can see such a clear fork in the road. We can either prop up the billionaire bailout society or we can begin the necessary process of breaking it up. You know what the financial interests want. It's now a question of whether popular resentment can be translated into a new populist rebellion.
Granted, it's not looking too good. But to quote Yogi Berra "It ain't over till it's over."
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It, Chelsea Green Publishing, June 2009.