A fight is brewing in Washington -- or, at the least, it ought to be brewing -- over whether to put limits on the size of financial entities in order that none becomes "too big to fail" in a future financial crisis.
Some background: The big banks that got federal bailouts, as well as their supporters in the administration and on the Hill, repeatedly say much of the cost of the giant taxpayer-funded bailout has already been repaid to the federal government by the banks that were bailed out. Hence, the actual cost of the bailout, they argue, is a small fraction of the $700 billion Congress appropriated.
True, but the apologists for the bailout leave out one gargantuan cost -- the damage to the economy, which we're still living with (witness the latest unemployment figures). Leave it to the Brits to calculate this. Andrew Haldane, Bank of England's Financial Stability Director, figures the financial crisis brought on by irresponsible bankers and regulators has cost the world economy about $4 trillion so far.
So while the bailout itself is gradually being repaid (don't hold your breath until AIG and GM repay, by the way), the cost of the failures that made the bailout necessary totals vast multiples of that.
Needless to say, the danger of an even bigger cost in coming years continues to grow because we still don't have a new law to prevent what happened from happening again. In fact, now that they know for sure they'll be bailed out, Wall Street banks -- and those who lend to them or invest in them -- have every incentive to take even bigger risks. In effect, taxpayers are implicitly subsidizing them to do so. (Haldane figures the value of that implicit subsidy to be about $60 billion a year for each big bank.)
Congress and the White House tell us not to worry because financial reform legislation will contain what's called a "resolution" mechanism allowing regulators to wind down any big bank that gets into trouble. (Think bankruptcy with more safeguards against runs on bank by creditors wanting to get their money out right away.) By virtue of this resolution authority, they say, future bank creditors will have to price in the possibility of the bank being allowed to fail. Hence, the implicit subsidy for risk-taking will disappear. At least that's the theory.
But the theory isn't likely to work in practice. Do you really believe bank regulators will use the resolution authority -- especially if two or more giant banks are endangered at the same time? Multiple threats are almost certain because each big bank races to copy any gambling technique that pays off big for any other. The reality is, they'll get bailed out.
Even if the resolution authority were combined with an array of new regulations designed to cover all the "shadow banking" operations of the giant banks -- requiring that they put up more capital and thereby limit their leverage -- there's no way such regulations can succeed. The giant banks already hire fleets of lawyers, accountants, and financial entrepreneurs to find loopholes in every existing regulation.
Finally, consider the political power of the big Wall Street banks. They and their executives and employees are now among the biggest contributors to both parties. Wall Street lobbyists are crawling over Capitol Hill. The banks and their lobbyists will ensure that regulatory loopholes are built into regulations from the start. Remember: They dismembered Glass-Steagall (with the help of their friends in the Fed, on the Hill, and in the Clinton White House), and fought off derivative regulation (ditto).
As long as the big banks are allowed to remain big, their political leverage over Washington will remain big. And as long as their political leverage remains big, the taxpayer and economic tab for the next mess they create will be big.
By all means, give regulators resolution authority and also impose the tightest regulations possible. But Congress and the White House shouldn't stop there. Limits should be placed on how big big banks can become.
How big? No one has been able to show significant efficiencies over $100 billion in assets. Make that the outside limit.
To be sure, smaller banks might still be subject to runs. That's why the Federal Deposit Insurance Corporation was created in the 1930s - to ensure depositors in the event a bank gets into trouble, so they won't have to run to protect their savings. And why the Glass-Steagall Act was passed - to separate commercial banking (where depositors put their money) from investment banking (where betting is done). We could expand insurance to certain categories of bank creditor, and we should resurrect Glass-Steagall.
But the only way to make sure no bank it too big to fail is to make sure no bank is too big. If Congress and the White House fail to do this, you have every reason to believe it's because Wall Street has paid them not to.
Cross-posted from RobertReich.org
Huff TV: Sam Stein On Obama's Retreat From Energy And Immigration Reform (VIDEO)
Huffington Post political reporter Sam Stein appeared on "Countdown With Keith Olbermann" Monday night to discuss President Obama's possible 2010 retreat from energy and immigration...
There's no real mystery to it. It's all about fraud.
1) Living wills for the top 100 banks, to allow their rapid resolution over a weekend.
2) Expanding the FDIC's resolution authority to both depository and non-depository (shadow) financial institutions.
3) Require similar leverage restrictions for depository and non-depository banks. These restrictions should go up in boom times and lower during a bust.
4) Separate investment banks and depository banks (i.e., bring back Glass-Steagall)
5) Apply the Volcker Rule: Depository banks should not trade on their own accounts.
6) Break up the top 10 banks; limit assets to $200 billion.
7) Require that the majority of outside board directors be banking industry experts.
8) Eliminate credit default swap "naked" positions, which are akin to allowing someone to buy insurance on someone else's car or house. Only allow them for hedging, not speculating.
9) Require a separate audit of risk management practices and assess the risk of the assets and liabilities of the bank. This should be done by specialized audit firms and the opinion published in the annual financial statements.
10) Require consolidation of off-balance sheet structures to the extent that the bank could be on the hook for any payments related to those funds.
It is obvious, from the above, that Prof. Reich disagrees with this position and has quite different policy recommendations. This is in important discussion for going forward with financial reform. When two such qualified individuals have such a disagreement, we know we are dealing with a complex and fundamental issue.
I would appreciate if some forum could be established for an extended examination of this problem by Prof. Krugman and Prof. Reich. We, and those who will decide on financial regulation, could learn quite a lot from this, not the least of which would be how to deal with a policy disagreement in a rational, informed and civil manner.
Regarding regulating business, their is no constitutional power for such, it was considered and rejected on Aug. 18th of the federal convention. Commerce is trade and navigation, nothing more, and any authority concerning business was left to the states.
Were congress to remain within their constitutional bounds, then we would not have all the influence of money, at least at the federal level. We then would not have certain businesses being favored over others, and we would limit the damage money can do when there are then 50 political bodies that businesses must factor in, and any legislative corruption would be easier dealt with as it is at a state level and closer to the people.
Also, why are just the businesses or financial institutions that make bad decisions that bring them down attacked and not the people who unwisely in them without becoming knowledgeable and shopping around. People spend years learning skills to be able to earn a living , and it's understood that education for a career is necessary, yet is it wise to not thoroughly research business practices, economics and the soundness of companies before putting investing money?
Also, 220 years ago, the US had 2 million people. It was an agrarian society. It had slavery. People rarely traveled more than 20 miles from thier birthplace throughout their ENTIRE LIVES. News took 6 weeks (or longer) to cross the Atlantic, and even MORE time to cross the country. A rapid-fire gun was three shots a minute. The most effective battlefield weapon was disease. African Americans were slaves. Women could not vote, or even own property.
Things have changed.
The Founding Fathers KNEW that things would change, and that there would be problems. So, the Constitution is very vague about a great many things. That was intentional. The details would get worked out by the people at the time that they were living in.
And we've worked out a great many of those details. By creating a stronger federal government.
Don't give us that "original intent" BS and try to pass it off as applying to the modern age.
So for all this talk about "originalism" with the Constitution, well, we don't LIVE in the US of 1789.
You bring up the conditions at the time of the enacting of the US constitution as if the principles of federalism, sovereignty and rule of law are ever changing. There is provision within the US constitution for granting to the federal government more power, or for adapting to the "times". BUT UNTIL then any power acted upon without being granted is a usurped power, and this takes away from the sovereignty of the people to determine through a formalized political process what they decide is needed at a federal level.
Don't you give me that BS that somehow that contracts entered into can just be voided and the mechanisms created by such contracts just shanghaied by any party in their favor.
That "anachronistic" crap argues only by implication, yet fails to offer any proof that a formalized binding agreement can just be jettisoned at will. It can be voided when there are violations, but not until then. The times have changed utterly fails as a legal argument, particularly when it is in the power of the people to amend the agreement.
The people then decided that through their respective political bodies they would enter into an agreement with other political bodies (the states) as it says in Article 7 of the US constitution...the Establishment of this Constitution between the States so ratifying the Same...It then says in the preamble to the Bill of Rights that the clauses of the US constitution are RESTRICTIVE and DECLARATORY and that further amendments were needed to insure that the powers of the federal government would not be abused or misconstrued. If the constitution is so "vague", how then could the clauses be declaratory or safely guarded against being misconstrued?
part 2 follows..
-no bailouts,
-ending Mark to Fantasy accounting allowed by FASB
-enforcement of Prompt Corrective Action, as required by the FDIC (which is really just a back door bailout).
Simply following principles will reveal the TBTFs for the Bankrupt Zombies that they are, and result in their failure, thus breaking them apart naturally. Creative Destruction at its finest.
It has also shown that both major parties are puppets controlled by big business.
Here's what Teddy Roosevelt had to say on the subject:
"The reason is evident, these men, the big bosses of the political field, the beneficiaries of privilege in the field of industry, the men who represent that sinister alliance between crooked politics and crooked business, which has done more than anything else for the corruption of American life, are united as one man against the genuine rule of the people themselves. The privileged classes, the representatives of special privilege, of special interests, can always make terms with a boss or bosses. They can make terms with the bosses who dominate the Republican party, they can make terms with the bosses who dominate the Democratic party, but they can’t make terms with the people. They can’t make terms with the men who honestly and genuinely represent the popular will."
Exactly. And as long as they remain huge, bonuses and salaries will be astronomical relative to the rest of the working class. Size limits need to be placed on all for profit corporations. We don't need to bail out the GNs and AIGs either. The only reason for all the foot dragging is as you said - campaign contributions will flow to those against reform not for it. We have to stop this cycle and break the stranglehold that is preventing a middle class recovery.
Why cant we just get back to simple rules and regulations? The banks thrive on complexity and being large makes this even more complex and both of those issues brought everything down. Simple fix, dont allow TBTF
You stated: "Finally, consider the political power of the big Wall Street banks. They and their executives and employees are now among the biggest contributors to both parties. Wall Street lobbyists are crawling over Capitol Hill. The banks and their lobbyists will ensure that regulatory loopholes are built into regulations from the start."
And then you stated: "How big? No one has been able to show significant efficiencies over $100 billion in assets. Make that the outside limit."
First of all, any policy analysis should include an acknowledgment that Congress cannot and will not pass laws to the detriment of the massive corporations that fund their elections and drown them in lobbyists. But why stop with the mega-banks? Why not recognize that too much wealth equates to too much power? Why not acknowledge that even excessive individual wealth poisons our democratic institutions? Why not acknowledge that capitalism itself ultimately seeks to supplant the will of the people with its own, self-serving objectives?
Secondly, setting the "outside limit" of corporate size at $100 billion using a standard of "significant efficiencies" is the wrong standard and reaches the wrong conclusion. Efficiencies are not the standard; democracy is. All large corporations, not just banks, should be reduced in size to protect our form of government from abuse. If the resultant size is not commercially viable, the industry should be nationalized. We cannot allow corporate cancer to spread any further into the body politic.
But capitalism is only the codification of the inherent human tendency to greed, and it just needs to be correctly channeled. Then it needs to be stopped before it runs off the rails, as the US already has. So someone is gonna need to get a large kick in the teeth: corrupt bankers, and their corrupt politicians. Bell Telephone was broken up: now we've had mobiles, internet and the tech boom.
Anti-trust needs to get serious: even over-enthusiastic. Split 'em up and keep 'em divided: a people-based imperial system instead of a corporate one! The only question now, is how to defeat them?