The best way for Senate Democrats and the White House to respond to the Republican charge that the Democrats' plan for financial reform doesn't go far enough to prevent another bailout is to call their bluff -- and simultaneously do what's necessary to avoid another bailout: Cap the size of big banks, as the UK is close to doing for its big banks.
The so-called "resolution" mechanism the Democrats are pushing to wind down any big bank that gets into trouble is a step in the right direction. But it won't work if two or more giant banks are endangered at the same time -- which is likely to be the case when the next crisis occurs because every big bank uses whatever profitable financial ploys every other bank uses (as they did in the run-up to the crash of 2008).
Furthermore, as I've noted before, as long as the big banks are allowed to be huge and become even bigger, their political clout in Washington will remain huge and become even bigger. And as long as they have this kind of clout, they'll wangle a bailout from Washington the next time their bets get them into trouble regardless of any "resolution" authority.
So the Dem bill must cut the big banks down to size. The limit should be $100 billion in assets.
Banks complain that their global competitiveness will suffer if they're held to this size. Baloney. No one has been able to show any competitive efficiencies above $100 billion in assets. And for Wall Street to suggest its global competitiveness is somehow tied to the competitiveness of the rest of the American economy is the height of hubris anyway. Wall Street is making deals all over the world (i.e. Goldman Sachs and Greece), it's parking its money all over the world, its star employees reside all over the globe, and it invests wherever it can get the best deals all over the world.
The only competitive advantage to being a giant bank headquartered on Wall Street is to have the economic and political clout to get bailed out by American taxpayers when the next crisis hits. We have learned this once. We do not need to learn it again.
Repeat: The only sure way to ensure that no bank becomes too big to fail is to make sure no bank is too big.
Cross-posted from RobertReich.org
Wallstreet is the oligarchy capital of the world. Today’s corporate management structure is a classic oligarchy bureaucratic pyramid management flowchart. Hundreds of thousands of American jobs depend on the success of this business model.
Hypothesis:
Wallstreet corporate industries will be back for more government assistance precisely because these industries are in reality “too big to succeed”. Like a huge dinosaur with a walnut sized brain, these entities roam without consciousness of direction and the trampling under their feet.
There is limit to the oligarchy bureaucratic pyramid management flowchart business model that guarantees breakdown when business size gets “too big to succeed”.
It is not possible to prove this hypothesis until too late. Recent occurrence of large corporate failures, however, suggests a pattern. (Citibank, AIG, Chrysler, Enron, Massey…) Large corporate failure is not limited to any particular industry.
It is only prudent our federal government plan carefully for re-occurrence of massive corporate “bailout”. The American taxpayer wants readiness when another starving brontosaurus corporation comes foraging for food. A thoughtful dismantling may be just what these business systems need.
How much “bailout” denial is required before this hypothesis is accepted and we face the problem squarely?
Citizen is coach to team democracy. Coach is responsible for success. It’s your call, coach.
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No, that's just one way.
A better, time-tested way would be to re-enact Glass-Steagall, which preserved the integrity of commercial banks from the late 1930's through the late 1990's by simply prohibiting commercial banks from combining with investment banks. It divorced commercial banks--dull, relatively low-risk enterprises on which all businesses and most individuals heavily rely--from the inherently high risk of investment banking.
Restore Glass-Steagall and institutional size immediately drops somewhat, the likelihood that any large commercial bank will require rescue at all becomes minimal (with a high degree of confidence), and our greed-driven, multi-millionaire-generating, high-risk investment banks can be left to their own devices--if they commit no fraud. The demise of one or more investment banks would thus become tolerable, as it would have little impact on most day-to-day economic activity.
A legal cap on bank size would be an artificial, arbitrary and politically incendiary way to avert a crisis the like of which was never encountered under Glass-Steagall. Size isn't the problem, nor are bailouts per se: exposing commercial banks to speculative risk is.
We need to address the actual problem. We need to re-enact Glass-Steagall!
Similarly, Secretary Reich's solution seems guaranteed to prod financial corportations into finding ways to hide, shift or otherwise manipulate assets in order to remain below the ceiling. There are a lot of people out there who specialize in doing this. Many of them have Enron on their resumes and don't happen to be currently incarcerated.
The *only* way to reliably prevent disasters such as '08 from happening again is to realize that "free market" and "government regulation" are perpetually engaged in a cat-and-mouse game. When regulations stay still for any length of time, those entitied being regulated are able to find ways to violate the spirit of the regulations without violating their letter. So regulations (be they Glass-Steagall or Maximum Asset Sizes) *must* be updated on a regular basis.
In addition, they must be updated by people who are not completely controlled by the organizations being regulated. Which probably dooms it right there, but at least doing things this way has a better chance of long-term stability than does any "regulation to fix the problem for all time" that we enact now.
Agreed! I hadn't thought of Glass-Steagall as being a panacea, but certainly created that impression while making a case for reenacting it as a way better option than setting a size limit for hybrid commercial/investment banks.
We need to enforce existing regulations now, enact a hearty, updated version of Glass-Steagall ASAP, and (as you assert) modify existing regulations (and/or enact new ones) whenever the need arises (and it will). Disinterested enforcement is imperative. If we go with that, we'll have divorced commercial banking from the dangers that inhere in investment banking, and be able to let each investment bank sink or swim on its own merits--and, in particular, go down without a bailout if run dishonestly, unprofitably or both.
I hope that adequately amends my statement and incorporates your well-founded key assertions!
Nice job. Well said. Fanned.
We've got to get this democracy functioning again by fighting government corruption--by getting the money out of politics. We've got to sternly regulate the lobbying industry and stop our reps and their employees from taking lobbying jobs when they leave office. This has to be done or nothing is going to get better in this country. And our representatives are not going to do it unless we force them to do it, because it's going to take money out of their pockets. That's it right there in a nutshell.
Democracy can't function if reps don't mind being voted out of office--and when $2,000,000 a year jobs await them (so long as they vote "properly" when in office), they don't mind. Get it? THAT'S THE PROBLEM!
Seems like a less wasteful, more productive and less costly idea than having courts order corporate split ups, putting companies with some intrinsic value into receivership or bankruptcy which reduces their output while things are sorted out. or the option of last resort, using taxpayer money to bail them out which is basically like keeping them on life support until the next decline in their already compromised health.
I agree with posts I read that this condition can't get here in the 1st place .. I am thinking in the way of a long tail slowly increase'g tax program that discourages Bigger & Bigger .. the whales (sharks) eat the small fish - this game cuts waste and overhead (maybe) * but it definitly cuts jobs and building spaces in the communities - we have seen this over and over - one big general store takes out many little fish - that whale has power over your citys for super benefits or they walk across the river
* coda - the (maybe) is a transfer - the reduction in waste is transferred to social programs to care for people in a world that is politically correct in not performing euthanasia on an unneeded population ... so I say again allow TBTF to Fail and see what 'ism you end up getting - there are only so many jobs this system can conjure up under the present game rules
The solution to fraud is to prosecute the fraud. All these big boys and girls playing their big games don't bother me, as long as they don't get to send me the bill when they lose.
The solution to lobbying is more difficult, especially with the SC ruling that corporations are "persons". I guess this means they have a "right" to political speech, but does it also mean we can put them in jail?
But, nope, the statists and socialists in Congress are trying to use the cover of "financial reform" to impose more government control on another sector of our economy.
Genuine financial reform would be targeted to insuring that the types of toxic assets that did so much damage could not be repeated. This would be a limited but very effective reform, but the Democratic bills in Congress go far beyond this valid goal.
Of course, real reform would also include revamping Freddie and Fannie, banning government pressure on banks to make subprime loans, and reforming Fed monetary policy.
Actually, I'd suggest that putting people in jail for defrauding their clients would go a long way toward preventing financial failures. As it stands today not a single person from these failed institutions has seen a life sentance handed down on them. Without consequences no wonder financial leaders see no "downside" to cheating the system to get rich.
In the absence of international agreement - in particular with Germany and China - none of this works.
On the other hand, US 'banks' can compete internationally. The problem is the people controlling them - anyone who calls himself Fabulous Fab must be at least slightly suspicious, not to mention the 21st century answer to Mr Ponzi.
The real answer to this is *democracy* - simply require that the heads of all US deposit takers are *elected*. After all we elect our judges, our sheriffs, our water and land use regulators - we elect *anyone* who controlls our life and isn't a professsional (doctors, engineers etc) - *EXCEPT* we don't elect our bankers. Why not? This is dumb - just elect the guys.
Criminalize campaign contribution 'bundling'; eliminating the reason for these 'bribery middlemen' (lobbyists) to exist - and it will expose the corrupt influences affecting EVERY bit of legislation in OUR country.
There is always some genius who comes along and thinks that he knows better. And he doesn't know much........
Businesses change, technology changes, societal standards change. The laws associated with each must change, too.
Would you argue that laws regulating the "business" of slavery were "smart"? Laws that gave men the right to make unilateral decisions on behalf of their wives/daughters?
The "good old days" were, by and large, not as good as we want to remember.