With the possible exception of the health care fight, there is no more important battle for the future of our economy and democracy than breaking up these too-big-to-fail financial institutions. Limiting their size, their economic power, and their political power is urgent and absolutely essential. The problem is that these Wall Street behemoths have such incredible power that very few politicians want to take them on.
The Obama administration, while they proposed some reasonably good regulatory changes in terms of consumer protections and dealing with the so-called "dark markets" (the derivatives and credit default swaps that were kept away from regulators over the past dozen years), appears to have for now decided they want to take a pass on the fight. Larry Summers, according to a recent story in the NYTimes, says that there is no going back to the days of small banks: "I don't think you can completely turn back the clock." The President himself, in a New York Times magazine interview, seemed focused more on regulation than on breaking up the big banks:
Q: There was this great debate among F.D.R.'s advisers about whether you had to split up companies - not just banks - you had to split up companies in order to regulate them effectively, or whether it was possible to have big, huge, sprawling, powerful companies - even not just possible, but better - and then have strong regulators. And it seems to me there's an analogy of that debate now. Which is, do you think it is O.K. to have these "supermarkets" regulated by strong regulators actually trying to regulate, or do we need some very different modern version of Glass-Steagall, in which we basically slim them down?
THE PRESIDENT: You know, I've looked at the evidence so far that indicates that other countries that have not seen some of the problems in their financial markets that we have nevertheless don't separate between investment banks and commercial banks, for example. They have a "supermarket" model that they've got strong regulation of.
The modest-sized regulatory package the White House just proposed reflects that this theory that regulation as opposed to Teddy Roosevelt style trust-busting is the way the administration wants to go.
So far, there doesn't seem to much more excitement for such a fight on Capitol Hill. Even progressive organizations have been slow to take up the fight, although I'm told the new coalition Americans for Financial Reform will be coming out with a policy paper soon on the issue.
The problem is that the too-big-to-fail is the central issue of our economic collapse. I become more convinced with each passing day, as I watch these should-be-discredited-pariahs dominate the Congress, that our economy will not start to seriously recover until we deal with this problem.
Our only hope is to build an outside of DC movement that rattles the walls. Politicians will not have the courage to take this on until we make it impossible for them to stop avoiding the issue.
Energy is more important than the other two combined. A broken financial system will cause a depression every twenty years or so. A broken health-care system will end our superpower status. But no more cheap energy would mean the collapse of civilization.
Even within the category of financial reform, breaking up the current batch of behemoths is less important than changing the system so that being too big to fail is no longer a free-money bonanza for those firms. If we break up the current ones, but continue to have un-paid-for implicit guarantees on the assets of any firm that's too big to fail, very soon we will have a new crop of them issuing bad debt that they can count on the taxpayers to make good. On the other hand, if we leave the current set of overgrown financial firms intact but change the rules so that they have to pay double for all the costs they impose and get to privatize only half of the spoils, they'll spin off operationson their own.
I think it's also more important to stop having huge swaths of the financial system be completely unregulated because they technically don't fit any of the regulatory categories, and to end regulator-shopping among firms that are regulated.
One scapegoat after another will be trotted out and put in prison, but the fact remains that we have experienced financial crime ... and, "high crime" ... at a truly gargantuan scale. And as long as the bribery continues, we are but "insects in the dust," but the "surplus population."
The force to overcome such a well-entrenched organized crime cannot be expected to come from the Executive Branch alone. It must come from people. From hundreds of millions of people who call themselves, quite rightly, "plaintiffs."
There are citizens of good faith who are organizing against this pernicious policy and the current financial doctrine in total. In fact, those of us with A New Way Forward (http://www.anewwayforward.org) co-sponsored a recent seminar where Mr. Lux was a featured speaker. Educate yourself about the issues and seriously consider getting involved- literally the future of our general prosperity is at stake.
We need a trust-buster like either Roosevelt back, albeit Franklin swiped the idea late (well, he was a Democrat, after all).
For perhaps a century that was a core Republican plank. I don't remember if it was Reagan who repudiated that GOP idea.
The problem with Summers' idea is that the next step is an institution that is too big to save. When it fails, the whole system will come down and we'll have the mother of all depressions. Tens of millions of Americans will fall from the middle class into poverty, from which they may never recover.
Summers' plan is too risky. Volcker wins this one on credibility.
Volcker pulled us out of the 70's stagflation
Summers got us into the bubble economy
The quotes you give from Summers and Obama are perfectly consistent with the assumption that they are well aware of the problerm, as is also amply expressed in the treasury white paper. The reform has as one of its cornerstones the goal to set up special resolution regimes for all candidates for financial institutions potentially too big to fail, no matter their structure or name (including insurance, investment banks (i.e. non-shadow-banks) etc.)
This goal is compatible with european style universal banks (Glass-Steagall type separation is not essential to it, and it's unclear to me which purpose that would serve, and also whether it can be meaningfully done at all) and it is also compatible with having a certain minimal size for internationally active banks.
In short: it is key to set up the process to let the behemoths fail and treasury is doing that.
And it's not even clear that they are terribly powerful. Economically they perform poorly, because there really is no good reason for the excessive size that they have reached. The influence they exert is more due to the crisis (bad moment for a breakup) than to political interconnectedness.
1) Re-instate Glass-Steagall.
2) Stricter regulation on derivatives.
3) Better enforcement of regulations.
4) Require all swaps, CDO/CDS exposures et. al. to be publicly disclosed at a transaction level
5) Other measures similar, as required.
Now the hard stuff....
6) Rank all the banks/bank holding companies by assets (domestic & offshore). Any bank currently ranked in the upper quartile must divest assets to bring it down to no higher than the top of the 3rd quartile. Assets/liabilities to be spun off are chosen at 'random' by the Fed (subject to prudent ALM techniques), and are spun-off to shareholders or IPO'd as a new bank, or sold to a smaller bank.
7) Repeat Step 6 every five years.
8) Ditto for insurance companies, thrifts, brokers.
Banks will be forced back into the era of syndicated loans instead of bought-deals - with resulting better due diligence; they'll have to keep their balance sheets cleaner because they might get stuck with crap every 5 years when the Fed rebalances them; and there will be more competition.
That's the money-center side. On the retail side there is lots of other stuff to do.
The economic recession is going into free fall because Obama, Geithner, Summers, the Federal Reserve and Congress have made the big banks bigger by giving them direct infusions of taxpayer dollars with no strings attached. With all the money tied up at the top, and no significant amounts of money being channeled into maintaining and expanding the job base, the U.S. is headed for a deep, long-lasting depression.
It will be an unusual depression of course, because 10% of the population that has federal dollars pouring into its coffers through the $12.8 trillion bank bailout will be flying high. The rest of the population whose livelihoods have been destroyed by the big banks and their looting of the U.S. treasury will be in dire straits.
More and more homes are going into foreclosure because of job losses caused by the recession. The middle class is being wrecked by a chain of events unleashed by the insolvency of the big banks and federal lawmakers' disastrous bailout of banks that should have been shut down or broken up.
The bailout money should be taken away from the big banks and re-channeled to real banks operating in the black and making credit available to credit-worthy borrowers, as well as state and local governments that are facing insolvency because of the recess and drop in sales taxes and property values.
Nancy,
A precision point for you. Capital is best thought of as "net worth" which is the difference between total assets and total liabilities. When capital is moved, it must be transformed into liquidity that either wire transfers or is liquid in some other sense of mobility. When capital is "injected" to a bank the accounting entry is to capital as net worth... but, (and here it is) the counter entry is to a liquidity account, their federal reserve clearing account, a liquid asset account for them. It's technically impossible to hoard capital in its constituent form.
the finacial sector should only be a facilitator
that is why Obama et al are going about this bass ackwards
propping up the fincial sector and ignoring the manufactuirng base when we should be doing precisely the opposite
All the Administration needs to put in place is a maximum limit to the amount of deposits covered by FDIC for any one institution. It can be a big number like $1 trillion, but some limit would be helpful while still allowing for numerous major banks to form.
they limit the scope of the debate.
When it comes to the economic "reforms" proposed by the Obama administration,
the debate has been limited to regulation without actual reform.
They are basically saying, we're going to let them play the same game, but we'll "debate" if we should watch them closer.
Meanwhile Investment bankers continue to gamble on unregulated commodity trading and credit default swaps.
When new regulations prevent large bonuses, CEOs simply double their pay.
Worried about US taxes and oversight? Just open new off-shore accounts.
And no one is even suggesting reinstating laws or protections that used to
prevent, or at least limit, this casino like mentality.
In fact, we are now letting them play with taxpayer money as well.
With Summers at Treasury and Giethner at the Fed, I don't suppose that any of us
should be surprised.
After all, with the same people driving the bus, why should we expect real change?
Republicans have lead this country through intimidation, accusation and insult since Reagan and you have ruined our country with their foreign aggression and domestic manipulation. Clinton was badgered by them in office with the phony contract with America, basically a promise to big corporations and banks that they would over turn all New Deal policies and regulations. They attacked Democrats with their demands and fixed elections for Bush. How in the hell did we go from one crook (Watergate) to another crook (Iran/Contra) and then another (Iraq) if the intent wasn't to circumvent the constitution through deceiving the public over and over again so business interests could use government for their own monetary gains without any concern for this countries people or needs. They ran us dry and into the ground. The only way forward is to nationalize everything in order to rein in and cool down the self perpetuating greed of big banks and business. Thank you and good night.