Too Big To Fail=Too Big To Exist
I am very glad that President Obama continues to talk in terms of strong new regulatory system for the financial industry. It is good to have a president, unlike the last one, who actually thinks government playing an oversight role in an industry that could destroy the entire world economy is a useful thing.
The coming legislative battle over the future of banking regulations will be an intense one, with lots of different ideas in the mix. Personally, I am not in favor of one big idea that the White House is floating, which is giving the Federal Reserve -- one of our nation's most secretive and least democratic institutions -- more power in the regulatory structure, especially given their complete failures to use the regulatory power they already have in constructive ways over the past decade. But, hey, this is going to be a long and involved debate, with lots of ideas floating, and big pros and cons to each of them. It's good we are having the debate right now, with the memory of the abject failures of our past regulatory structure fresh in our memories. What will be urgently important is keeping progressive minded folks engaged in this battle.
There is one hugely important thing that is not being talked about nearly enough, though.
It's that breaking up these financial monstrosities that have the power to destroy our economy. The biggest applause line I have had in my book tour, by far and without exception, is this one: "If you are too big to fail, you are too big to exist." I think the American public, including a great many Republicans, is in overwhelming agreement of that basic notion, and yet breaking up these banking behemoths is not very high on the list of things politicians and pundits are talking about. It damn well should be. If one company can wreck the entire world economy by its stupid decisions, that company absolutely needs to be broken up into smaller regional or sector pieces.
At this point, though, not nearly enough people are talking about that essential need. President Obama apparently believes that a stronger regulatory approach can solve the problem alone. Here, for example, is Obama in an interview with the New York Times Magazine:
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.
That quick answer does not give us a full indication of his overall thinking on the need to break up these big banks, but it is not encouraging, and I hope he does give the idea serious consideration. In the meantime, I hope members of Congress and other players in this debate give full-throated cry to breaking up these monsters. Nothing would be better for the long-term health of our economy and our democracy.
Loading comments…
Want to reply to a comment? Hint: Click "Reply" at the bottom of the comment; after being approved your comment will appear directly underneath the comment you replied to
I'm reminded of how what we are talking about here is effecting our diets and how we eat. For the last 20 or 30 years small farms have been taken over by Agribusnesses that have industrialized our food production. Because of this we now have genetically modified foods that have been irradiated and inundated with pesticides, while at the same time cows, swine, and chickens have been cramped into the diseased industrial mix. This is all because I have to buy my tomatoes from New Jersey when a local farm could sell me a much better, and better for me tomatoe. This has lead to a class of people called 'localvores' who just eat local food. If we don't reverse this revolution of food soon I'm sure it won't be long before we are all eating soylent green.
In today's world of banking and finance the 500 pound gorilla directing policy and practice is the privately owned Federal Reserve System. Nothing of importance in these sectors happens without the Feds ok. They don't even let their IG know what's going on, based on her testimony last week.
That we never needed a Central Bank is patently obvious given the history of the controversy...from Washington to Obama...over sovereign rights to control currency. That right was stolen from the Gov by the J.P. Morgan cabal in 1913, and has been the source of all major and minor financial debacles including the current meltdown.
The only way this nation gets to control the size of all private sector institutions is to control the Federal Reserve System. Let the U.S. Gov. issue debt free currency and set interest rates. The latter eliminates a federal fractional reserve system of perpetual inflation, and the former eliminates the need for an income tax. Local and regional banks would flourish since the Federal Government would issue debt free currency for payment of goods and services delivered to and for the Federal government.
Eliminate the profit streams built upon usury and you reduce the size of institutions.
I'm on. How do we break up Wal-Mart?
Your headline mirrors my own statements on the banking problem. Any corporate behemoth too big to fail should not exist.
These overly large corporations have been blackmailing the politicians. They know that if they go down, the politicians go down with them. That is what is meant by "too big to fail". It's the domino theory that if the big corporations go down, the politicians will be blamed, and will get voted out for the mess. So, the politicians had better to what the large corporations want them to, or else they will get voted out.
No small business could do this to the government. Only the mega-corporations that have been allowed to grow unchecked have this kind of power. They also act less competitively and more like a monopoly and a bureaucracy the larger they get. So, they are less responsive to consumers and to the market than smaller companies. And they are more likely to lobby politicians to get what they want than smaller companies are, who concentrate more on providing their goods and services to the public.
No entity should have this kind of power. Anti-trust laws should be enforced more strictly. Mergers shouldn't be allowed except in unusual circumstances. This BS about synergies and economies of scale when there is a merger does not serve the public. It seems great to the boards and their ego trips to be ruling over a larger corporation, but the public loses in these deals. They need to be tightly regulated.
Earlier posts were mangled in transmission.
I agree that large financial institutions need to be broken up into parts that can succeed or fail on a competitive basis. The economies of scale enable large, poorly managed institutions to succeed at the expense of smaller, better managed ones.... true for banking, business, government and armies. A competitive market, where success or failure is based on quality of leadership, requires at least 12 participants of roughly equal size (minimum sample size for statistical confidence). Most of our markets are way out of whack... and now size masks management incompetence - and overpays for it- until it the organization gets so weak that it must be rescued by the taxpayer.
Term limits on corporations ( around 60 years), market share limits of less than 10% in national markets, and tax regulations which gradually penalize institutions that exceed such limits and encourage asset disposal.
Free markets produce decentralized decision making that is continually tested against alternatives. They breed tested decision makers and risk takers- leaders we need for business and politics-, instead of leaders who rose through middle management through judicious butt kissing to become untested executives of large enterprises. (Note: I was CEO of a smaller hi-tech firm for 16 years)
There are several posts on my blog http://www.dismountingourtiger.comm) that fully support Mike Lux’s position.
My earlier post was mangled in transmission.
I agree that large financial institutions need to be broken up into parts that can succeed or fail on a competitive basis. The economies of scale enable large, poorly managed institutions to succeed at the expense of smaller, better managed ones.... true for banking, business, government and armies. A competitive market, where success or failure is based on quality of leadership, requires at least 12 participants of roughly equal size (minimum sample size for statistical confidence). Most of our markets are way out of whack... and now size masks management incompetence - and overpays for it- until it the organization gets so weak that it must be rescued by the taxpayer.
Term limits on corporations (~60 years), market share limits (
That will be tough, because they are not all American. And it's logical to say there are few that are American. Good luck with that scam!!!
I agree that large financial institutions need to be broken up into parts that can succeed or fail on a competitive basis. The economies of scale enable large, poorly managed institutions to succeed at the expense of smaller, better managed ones.... true for banking, business, government and armies. A competitive market, where success or failure is based on quality of leadership, requires at least 12 participants of roughly equal size (minimum sample size for statistical confidence). Most of our markets are way out of whack... and now size masks management incompetence - and overepays for it- until it the organization gets so weak that it must be rescued by the taxpayer.
Term limits on corporations (~60 years), market share limits (
This is exactly right. Supply and demand break down when monopolies (or a small syndicate) exist. They no longer have to be competitive which means that they can charge whatever they want REGARDLESS of the supply or the demand. And if that's not enough, they can shrink the supply on purpose to increase demand which increases the prices.
It's price fixing, pure and simple.
We saw it with the $4+ gallon of gas. Exxon raised the prices because they COULD. Not because they needed to. They claimed it was because of increased demand from India and China, but the price doubled within just a few months. Somehow I doubt the 2 largest countries in the world doubled their gasoline consumption that quickly. Furthermore, when Bush went to the Saudi's to ask them to increase production (they were at about 80%) they retorted that they were "meeting demand." And as a result, companies in the US who depend on low gas prices (like truckers) went bankrupt and that helped spur the popping of the mortgagee bubble.
Why conservatives aren't going crazy about this (seeing as how Monopolies and syndicates are anathema to free market capitalism) I have no idea.
We should call the oil giants and bankers what they are: Robber Barons.
I like this idea, though I'm not sure it is feasible. I'd like to hear more about it.
Why is it not feasible?
Wouldn't you rather spend only $10 billion to break them up and reorganize them than spend another $100 billion to keep their corrupt practices alive?
It's just a matter of priorities.
Mike,
Sarbannes Oxley was the putative response to the Enron debacle It was form over substance, it was a weight to runner. It was essentially counterproductive. But it was the "good boy" response of contrition. So... where does that leave the smarting citizen? More meaningless myopia of regulation or do we get the diagnosis of the problem and make a prescription for solution that has leggs? 92% of the bureaucratic effort will be placed at the former. If we are lucky there will be four or so modifications to the conduct of business that will preempt what we've come through. I am not very smart, but I'll give you five:
1. The Fed must keep real interest rates at 5-6% No negative real interest rates!
2. All Investment Banks are to be regulated by an SEC an SEC with teeth.
3. All margin requirements for financial insturments 50% (hedge funds shrink)
4. No negative shorting.
5. All state level brokerage in financial assets to be regulated by state level.
You must be logged in to comment. Log in or connect with
