How to cut megabanks down to size(nytimes.com)
nytimes.com
How to cut megabanks down to size
http://www.nytimes.com/2013/01/20/business/a-fed-voice-asking-to-cut-megabanks-down-to-size.html
106 comments
I always remember what Milton Friedman used to say, he was amazed be people who see failure of regulation and propose a fix by seeking to introduce even more regulation.
"well this time it will surely work!" "if only we had the right kind of regulation/people in charge!" they say.
That's never gonna happen. Breaking the system in chunks artificially will not work, because it will consolidate again and buy up the regulators. The true solution here is Bitcoin, precisely because it is not controlled by anyone.
"well this time it will surely work!" "if only we had the right kind of regulation/people in charge!" they say.
That's never gonna happen. Breaking the system in chunks artificially will not work, because it will consolidate again and buy up the regulators. The true solution here is Bitcoin, precisely because it is not controlled by anyone.
Extending this theory to the world of software it would make it foolish to update or iterate or anything, because thanks to the passage of time, you're just going to have to update and iterate all over again again.
On the other hand, rejecting idiocy like this gets us from Astrology to Astronomy, from Alchemy to Chemistry, and the Magna Carta to the US Constitution, and further, the amendments to it.
On the other hand, rejecting idiocy like this gets us from Astrology to Astronomy, from Alchemy to Chemistry, and the Magna Carta to the US Constitution, and further, the amendments to it.
I used to be an Austrian but it's been almost a century now and it's become clear to me that the Keynesians are actually correct. Even after the GFC things bounced back very quickly. The power to inflate away old debt is too useful to sacrifice.
Hm, it's interesting, would you care to elaborate: what do you mean by "too useful"? Too useful for whom?
Well let me put it this way:
If the USA kept the gold standard, I seriously doubt they'd be the number 1 economy in 2013.
If the USA kept the gold standard, I seriously doubt they'd be the number 1 economy in 2013.
But you're not explaining your claim. How can possibly printing money can make society as a whole richer? It can make certain individuals better off, for sure (the ones who receive the newly created money first while the prices are low). But how does it make the economy as a whole better off? No additional value gets created.
The well known part of Keynesian thinking is about the output gap. So if you give money to a formerly unemployed guy to dig a hole, you create the value of the hole in addition to all the other value the economy would create anyhow. This applies of course only if that guy is unemployed in the first place.
And as a rule of thump, every time I read a Austrian argument, I try to find the hidden assumption of markets working at full capacity. ( And every time I read a Keynesian argument I try to find the hidden assumption of an output gap.) Usually this is a nice way to understand the argument better.
And as a rule of thump, every time I read a Austrian argument, I try to find the hidden assumption of markets working at full capacity. ( And every time I read a Keynesian argument I try to find the hidden assumption of an output gap.) Usually this is a nice way to understand the argument better.
I think the point is inflation increases the money supply, while debt remains the same. Individuals make more money with less buying power, but can pay off debt easier.
Well that's good for people with debts. It's bad for people without debts and those who loaned them money. Debtors are basically paying off their debts more easily at the expense of all the others (even those who are not involved in the deal of loaning).
as long as the inflation rate is expected, the inflation rate is always adjusted up/down to compensate for the inflation.
In the mean time the average real salary has been dropping since 1969, because of inflation, and because the government and companies didn't bother to increase the minimum and average wages to keep pace with the inflation.
So I really doubt most of the population benefits from inflation.
So I really doubt most of the population benefits from inflation.
You see this as a "failure of regulation"? I see it as a failure of deregulation. We passed laws and made interpretations which reduced the effect of structural safeguards in the financial system. We didn't pass laws which strengthened those safeguards or improved oversight.
As for "manageable chunks", vs. "artificial" chunks, I point you to this comment by Alan Greenspan, in http://www.freepatentsonline.com/article/Brookings-Papers-Ec..., that the current size is too large, and not manageable.
> For years the Federal Reserve was concerned about the ever-growing size of our largest financial institutions. Federal Reserve research had been unable to find economies of scale in banking beyond a modest size (Berger and Humphrey 1994, p. 7; see also Berger 1994). A decade ago, citing such evidence, I noted that "megabanks being formed by growth and consolidation are increasingly complex entities that create the potential for unusually large systemic risks in the national and international economy should they fail" (Greenspan 1999). Regrettably, we did little to address the problem.
> ... However, should contingent capital bonds prove insufficient, we should allow large institutions to fail and, if assessed by regulators as too interconnected to liquidate quickly, be taken into a special bankruptcy facility, whereupon the regulator would be granted access to taxpayer funds for "debtor-in-possession financing" of the failed institution. Its creditors (when equity is wholly wiped out) would be subject to statutorily defined principles of discounts from par ("haircuts"), and the institution would then be required to split up into separate units, none of which should be of a size that is too big to fail. The whole process would be administered by a panel of judges expert in finance.
This is based on issuing contingent capital bonds, which funds a "living will" "in which financial intermediaries are required to offer their own plans to wind themselves down in the event they fail."
As for "manageable chunks", vs. "artificial" chunks, I point you to this comment by Alan Greenspan, in http://www.freepatentsonline.com/article/Brookings-Papers-Ec..., that the current size is too large, and not manageable.
> For years the Federal Reserve was concerned about the ever-growing size of our largest financial institutions. Federal Reserve research had been unable to find economies of scale in banking beyond a modest size (Berger and Humphrey 1994, p. 7; see also Berger 1994). A decade ago, citing such evidence, I noted that "megabanks being formed by growth and consolidation are increasingly complex entities that create the potential for unusually large systemic risks in the national and international economy should they fail" (Greenspan 1999). Regrettably, we did little to address the problem.
> ... However, should contingent capital bonds prove insufficient, we should allow large institutions to fail and, if assessed by regulators as too interconnected to liquidate quickly, be taken into a special bankruptcy facility, whereupon the regulator would be granted access to taxpayer funds for "debtor-in-possession financing" of the failed institution. Its creditors (when equity is wholly wiped out) would be subject to statutorily defined principles of discounts from par ("haircuts"), and the institution would then be required to split up into separate units, none of which should be of a size that is too big to fail. The whole process would be administered by a panel of judges expert in finance.
This is based on issuing contingent capital bonds, which funds a "living will" "in which financial intermediaries are required to offer their own plans to wind themselves down in the event they fail."
The real problem is that they are successful in duping governments to underwrite the risks they take. And they LEGALLY influence legislators to rewrite laws so they can LEGALLY take more risks. And when things blow up, they LEGALLY influence them again to get bailouts.
The incidents you cite above happened to exploit the fact that there is someone who will absorb all the risks of otherwise unprofitable practices.
The incidents you cite above happened to exploit the fact that there is someone who will absorb all the risks of otherwise unprofitable practices.
>small institutions must submit to the rigors of the free market.
>market discipline has worked to keep smaller institutions on the straight and narrow, it has been ineffective with megabanks
>market participants have proved [in]effective in monitoring risks at these [huge banks].
>They know they will be protected by a taxpayer rescue should a large institution teeter.
How is this not obvious to everyone involved?
>market discipline has worked to keep smaller institutions on the straight and narrow, it has been ineffective with megabanks
>market participants have proved [in]effective in monitoring risks at these [huge banks].
>They know they will be protected by a taxpayer rescue should a large institution teeter.
How is this not obvious to everyone involved?
They are obvious and breaking up the banks is a popular topic of speculation in the finance industry. What's a mystery is why it is taking so long for mainstream econ and op-ed writers to catch on.
Paul Krugman, for example, proposed that big banks like Citibank provide value by having a huge service network, and therefore he's skeptical of breaking up banks. Which is true--Citibank's size is the primary (and probably only) reason I'm a Citibank customer. But the unstated assumption that there must necessarily a 1:1 ratio of Too-Big-To-Fail bunches of assets to bank service networks is baffling to me.
There seems to be a TBTF blind spot in the sphere of wide-area economic and financial knowledge; that is just one example. The solution is always "more regulation", or occasionally, "better regulation" with the implication that everything is the government's fault.
Paul Krugman, for example, proposed that big banks like Citibank provide value by having a huge service network, and therefore he's skeptical of breaking up banks. Which is true--Citibank's size is the primary (and probably only) reason I'm a Citibank customer. But the unstated assumption that there must necessarily a 1:1 ratio of Too-Big-To-Fail bunches of assets to bank service networks is baffling to me.
There seems to be a TBTF blind spot in the sphere of wide-area economic and financial knowledge; that is just one example. The solution is always "more regulation", or occasionally, "better regulation" with the implication that everything is the government's fault.
What's a mystery is why it is taking so long for mainstream econ and op-ed writers to catch on.
I think they're quite familiar with the idea and have caught onto it long ago; they just don't want to be misrepresented as advocating a government takeover of the finance industry or as communists or whatever. It's not so much that they favor large institutions, as they're trying be moderate and consider both sides of the argument.
By contrast, read the editorial pages or the comment sections of the Wall Street Journal, in which Obama is regularly characterized as a Marxist ideologue and worse, and any sort of regulation or disciplinary action against the financial services sector is characterized a shakedown, at best. If the government actually proposed carving up the banks there would be (even more) howls for his impeachment. Much as only Nixon could go to China, a reset of the financial sector could only come from some prominent Republican, and a fiscally hawkish one at that.
I think they're quite familiar with the idea and have caught onto it long ago; they just don't want to be misrepresented as advocating a government takeover of the finance industry or as communists or whatever. It's not so much that they favor large institutions, as they're trying be moderate and consider both sides of the argument.
By contrast, read the editorial pages or the comment sections of the Wall Street Journal, in which Obama is regularly characterized as a Marxist ideologue and worse, and any sort of regulation or disciplinary action against the financial services sector is characterized a shakedown, at best. If the government actually proposed carving up the banks there would be (even more) howls for his impeachment. Much as only Nixon could go to China, a reset of the financial sector could only come from some prominent Republican, and a fiscally hawkish one at that.
An example of how large collections of assets and large service networks don't have to have a 1:1 correspondence:
I'm a member of a two-branch credit union, but I get to use a fairly extensive service network through the Credit Union Service Center system, where a large number of small institutions share the customer-service side of their operations. In the SF bay area, I get full service from any of the several dozen branches of Patelco and USE, plus several smaller CUs.
I'm a member of a two-branch credit union, but I get to use a fairly extensive service network through the Credit Union Service Center system, where a large number of small institutions share the customer-service side of their operations. In the SF bay area, I get full service from any of the several dozen branches of Patelco and USE, plus several smaller CUs.
The only one who should be allowed to be too big to fail is the government itself. The logical conclusion is that everything which should be really big should be owned by the government. Then win and loss is for the society as a whole.
Smaller banks survived this crisis with relatively few failures but that has not always been the case (e.g. Savings and Loans crisis). However the fact that they can fail is critical and a sufficient reason to break them up even if it won't make them better.
Banks that are too big to fail are too big to be allowed to exist. Government protection only for the commercial/retail part is an obvious but insufficient requirement.
Banks that are too big to fail are too big to be allowed to exist. Government protection only for the commercial/retail part is an obvious but insufficient requirement.
It's not clear to me how "bigness" matters. The article makes clear that small banks were exposed to disciplining market forces, but for large banks such forces were obviated by government protection. Worrying about size seems to miss the point.
"Bigness" matters because only a few of the large banks are primary dealers [1] - they directly play a role in US treasury auctions. All the other investment banks that aren't primary dealers only play a part in the secondary market. Part of this relationship is also the agreement that large banks are always making markets [2] and providing liquidity for highly-traded Fixed Income products - without someone to make the markets, no one would be able to trade. A large part of the global finance system is based on the ability to easily buy or sell these products, from the huge institutional clients like Fidelity, to the individual investor using their Schwab account (albeit even that is done through a much larger entity to access the market). The move towards computerization in the financial industry over the past 30 years has directly impacted the bottom line of these large banks (via smaller bid/ask spreads [3]), but has also directly lead to increased liquidity due to trading volume.
[1] http://en.wikipedia.org/wiki/Primary_dealer [2] http://en.wikipedia.org/wiki/Market_maker [3] http://en.wikipedia.org/wiki/Bid-offer_spread
[1] http://en.wikipedia.org/wiki/Primary_dealer [2] http://en.wikipedia.org/wiki/Market_maker [3] http://en.wikipedia.org/wiki/Bid-offer_spread
"Obviated by government protection" BECAUSE of their size. Thus the slogan "too BIG to fail".
When big banks make money by taking crazy risks, they earned every penny and how DARE we try to tax or regulate them. When they lose money by taking risks, we need to bail them out for the good of the free world and how DARE we ask to be paid back. Small banks do not have this attitude.
When big banks make money by taking crazy risks, they earned every penny and how DARE we try to tax or regulate them. When they lose money by taking risks, we need to bail them out for the good of the free world and how DARE we ask to be paid back. Small banks do not have this attitude.
Aka the privatization of profit with the socialization of loss. It's absurdity. Unless you're the profiteer.
How much collateral damage will there be if they fail? This is the reason the banks got bailed out, they are big and complicated so can't be unpicked and wound up.
If they were smaller the collateral damage is smaller and wind up manageable. There are real reasons for not letting big banks fail so we need to avoid them getting that big and complicated so they can be allowed to fail.
If they were smaller the collateral damage is smaller and wind up manageable. There are real reasons for not letting big banks fail so we need to avoid them getting that big and complicated so they can be allowed to fail.
Why have government protection at all?
"They know they will be protected by a taxpayer rescue should a large institution teeter."
This should be mitigated by the fact that shareholders will lose value, even in the event of a taxpayer rescue. Meaning, a bailout isn't a good insurance policy for a shareholder because they lose anyway. But that fear of a bailout doesn't seem to limit the risk appetite as I'd expect.
I think it's because regulation and control hasn't made this type of risk transparent to the shareholder. The shareholder isn't calling for these types of regulations because of fear the regulation would be overbearing and hurt profitability.
Often, over regulation is a shortsighted concern that allows a company to take on more risk than an investor would typically allow for (at existing valuations).
This should be mitigated by the fact that shareholders will lose value, even in the event of a taxpayer rescue. Meaning, a bailout isn't a good insurance policy for a shareholder because they lose anyway. But that fear of a bailout doesn't seem to limit the risk appetite as I'd expect.
I think it's because regulation and control hasn't made this type of risk transparent to the shareholder. The shareholder isn't calling for these types of regulations because of fear the regulation would be overbearing and hurt profitability.
Often, over regulation is a shortsighted concern that allows a company to take on more risk than an investor would typically allow for (at existing valuations).
Shareholders have very little power over the big banks. The bank managers and traders have perfected demonstrating the principal-agent problem (link below). For example, huge bonuses being paid out even as the banks were being torn apart around them. Managers and traders kept arguing that they need to retain "talent", to the detriment of the supposed owners of the business.
http://en.wikipedia.org/wiki/Principal%E2%80%93agent_problem
More simply:
Taxpayers are suckers
Lenders are suckers
Shareholders are suckers
Managers and traders, not suckers.
http://en.wikipedia.org/wiki/Principal%E2%80%93agent_problem
More simply:
Taxpayers are suckers
Lenders are suckers
Shareholders are suckers
Managers and traders, not suckers.
Didn't the shareholders lose out during the past crisis? Just look at the beating the stocks of the major banks took.
Because it's a narrative with no basis in fact? The smaller banks were the ones hardest hit by the popping of the financial bubble. GS/MS/JPM didn't need the bailout, Lehman and Bear Stearns failed in a free market manner, and Merrill Lynch was bought out. It was the smaller banks that really needed the bailout money.
1) that's factually incorrect, 2 of the top five Wall Street firms failed (Lehman and Bear Stearns).
2) the other 3 (Goldman, Morgan Stanley, Merrill Lynch) would have failed after Lehman, the entire financial system had to be backstopped by the government. (If you look beyond pure securities firms, the largest insurance company (AIG) failed as well as the largest bank (Citibank - it effectively got nationalized and shareholders were wiped out, look at a stock price chart (http://finance.yahoo.com/q/bc?s=C&t=my&l=off&z=l...)
The lesson learned is that the financial system can't survive a failure like Lehman without a government backstop.
So, pick your poison, either 1) permanent government backstop and some regulation to go with, it, ie don't let bankers run leveraged hedge funds on the public dime, take all the profits in good times and stick taxpayers with the bill when it goes south.
Or 2) smaller banks that can fail without taking the whole system down.
2) the other 3 (Goldman, Morgan Stanley, Merrill Lynch) would have failed after Lehman, the entire financial system had to be backstopped by the government. (If you look beyond pure securities firms, the largest insurance company (AIG) failed as well as the largest bank (Citibank - it effectively got nationalized and shareholders were wiped out, look at a stock price chart (http://finance.yahoo.com/q/bc?s=C&t=my&l=off&z=l...)
The lesson learned is that the financial system can't survive a failure like Lehman without a government backstop.
So, pick your poison, either 1) permanent government backstop and some regulation to go with, it, ie don't let bankers run leveraged hedge funds on the public dime, take all the profits in good times and stick taxpayers with the bill when it goes south.
Or 2) smaller banks that can fail without taking the whole system down.
How about (3), a government not run by Bush/Greenspan/Krugman/Obama/Bernanke, a government not intent on creating housing bubbles in the first place?
Let the banks go bust by all means, but let's also recognize that government regulation/incentives ($440B from Fannie Mae!) was a large part of what got us into this mess.
http://articles.cnn.com/2002-06-17/politics/bush.minority.ho...
Let the banks go bust by all means, but let's also recognize that government regulation/incentives ($440B from Fannie Mae!) was a large part of what got us into this mess.
http://articles.cnn.com/2002-06-17/politics/bush.minority.ho...
Fannie Mae, Freddie Mac and the federal Home Loan Banks --
the government-sponsored corporations that handle home
mortgages -- will increase their commitment to minority
markets by more than $440 billion, Bush said.
Under one of the initiatives launched by Freddie Mac,
consumers with poor credit will be able to obtain mortgages
with interest rates that automatically decline after a
period of consistent payments, he added.
To fight this recession the Fed needs more than a snapback;
it needs soaring household spending to offset moribund
business investment. And to do that, as Paul McCulley of
Pimco put it, Alan Greenspan needs to create a housing
bubble to replace the Nasdaq bubble.
Paul Krugman, 2002Most people in the financial sector do not think Goldman, MS, or JPM would have failed without the bailout. Lehman and Bear Stearns did fail, but their failure was largely handled within the banking system itself (a lot of Lehman being bought by Barclays and Bear Stearns being absorbed by JPM).
It's the smaller banks that struggled the most and continue to do so: http://articles.latimes.com/2012/jul/06/business/la-fi-banks...
It's the smaller banks that struggled the most and continue to do so: http://articles.latimes.com/2012/jul/06/business/la-fi-banks...
every well-informed person in the financial sector knows what I said is true.
of course there are always some people who believe whatever they want to believe.
of course there are always some people who believe whatever they want to believe.
And how many of those people benefited directly from the bailouts? The idea that banks can't be allowed to fail is the fundamental fallacy that has underpinned the last five years. Of course they will argue that they "needed" their noses in the public trough.
all of them, I guess?
not sure what you're advocating...in the Great Depression banks failed, the depositors lost all their savings, triggering runs on other banks, etc., hence the name Great Depression. so that wasn't a very sound policy.
on the other hand a government backstop for a bunch of traders making giant risky bets with depositors' money so heads they win, tails we lose, is not a sound policy either.
somewhere there's a reasonable medium, collectively safeguard the payments system and bank deposits, without giving banks carte blanche to use depositors' money and government backup to make risky bets.
and don't let banks get so big that it's both an administrative nightmare to shut one down, and they have enough political power to thwart shutdowns and effective regulation.
not sure what you're advocating...in the Great Depression banks failed, the depositors lost all their savings, triggering runs on other banks, etc., hence the name Great Depression. so that wasn't a very sound policy.
on the other hand a government backstop for a bunch of traders making giant risky bets with depositors' money so heads they win, tails we lose, is not a sound policy either.
somewhere there's a reasonable medium, collectively safeguard the payments system and bank deposits, without giving banks carte blanche to use depositors' money and government backup to make risky bets.
and don't let banks get so big that it's both an administrative nightmare to shut one down, and they have enough political power to thwart shutdowns and effective regulation.
I'd say the policy should be: reinstate glass-steigal on steroids. If and when banks fail, blow out the management and have unlimited FDIC insurance backstopped by the Fed. No need to apply discipline on the liability side of banking because it hurts main street. If the investment banks fail ( not commercial banks ) let them die. Whatever damage that causes to the macro economy, make up for it by providing stimulus projects/tax cuts as needed. Lets stop privatizing profits and socializing losses. BTW, you are right GS and JPM would have gone under if not for the bail outs. They were experiencing a classic bank run and not enough liquidity to support. A great opportunity to clean up wall street was missed. Instead the country was looted at the expense of main street and they got away with it. That is how it will look 100 years from now.
We will never know the truth. The CEO of every financial institution swears up and down about the strength of their company right up until the moment it goes bankrupt. Look at Jon Corzine and MF Global...
Merrill Lynch hardly failed in a free market manner. It was bought out based on guarantees from the taxpayers IIRC. GS also got help from the SEC in the form of a temporary ban on shorting. I'm not saying you're wrong, just that you've over-simplified the situation... there really aren't any free markets when it comes to finance.
Really? So it was the credit unions that were decimated by the crisis? Or did you just mean the "smaller of the giants"?
Systemic risk to an investment class such as mortgages, means that most banks would be subject to the same ill effects, and smaller less diversified banks will fail. There were 157 bank failures in 2010...zero in 2006. http://www.fdic.gov/bank/historical/bank/2010/index.html
However, just limit the amount of Federal Deposit Insurance that can be issued to one entity, if we can't figure out what they're doing.
However, just limit the amount of Federal Deposit Insurance that can be issued to one entity, if we can't figure out what they're doing.
[deleted]
I'm confused by this. The large banks are (arguably) more efficient because of economies of scale, eg. less duplicated management, purchasing power. So it's probably not a good idea to limit the size of banks which is what this article seems to propose, because that'll make banking more expensive.
But the flip side is: why don't we just let megabanks go bust? If they go bust, the government steps in, briefly nationalizes them, sells off the parts (the shareholders get nothing, of course), and life continues. As long as this period is kept as short as possible why is there any danger of "meltdown"?
But the flip side is: why don't we just let megabanks go bust? If they go bust, the government steps in, briefly nationalizes them, sells off the parts (the shareholders get nothing, of course), and life continues. As long as this period is kept as short as possible why is there any danger of "meltdown"?
"the government steps in, briefly nationalizes them, sells off the parts (the shareholders get nothing, of course), and life continues"
That's the solution I would have preferred in 2008, but the political system has shown it can't commit to that solution. You lose any support for that resolution plan from conservatives at "briefly nationalizes", because they're afraid any nationalization won't turn out to be brief at all. So nationalization is off the table, and we have to stumble through with bailouts.
That's the solution I would have preferred in 2008, but the political system has shown it can't commit to that solution. You lose any support for that resolution plan from conservatives at "briefly nationalizes", because they're afraid any nationalization won't turn out to be brief at all. So nationalization is off the table, and we have to stumble through with bailouts.
Per the article, size is correlated with problems but not the cause of them. It happens that large banks are the ones who are more likely to get bailed out, thus they are incentivized to take more risk, so they do. It is the potential for government bailouts/protections that is the root of the issue, thus the proposal is basically to stop doing that.
The problem is not the bailout, per se, the problem is that the bailout didn't wipe-out shareholder value (and executive compensation) in the process.
the problem is the bailout, just don't bail them out.
Your first argument rests on the idea that they will pass those economies of scale on to consumers, which I have never found to be the case. In my experience, smaller banks are consistently more competitive; they pay higher rates, charge lower rates, and have fewer fees.
If you do that you're still subsidizing banks. The simple act of telling creditors that if the banks gets into trouble the government will step in, wipe out shareholders and keep depositors and creditors whole, makes credit more available to them. Of course I'd rather lend to a bank with that kind of backstop than a small savings bank/credit union.
And then if I'm a bank manager, I'm going to borrow as much as possible, and do a lot of high-risk, high return type trading, if it works out I make a ton of money, if I lose it's the government's problem.
Finally, it's not that likely for a Treasury official to tell a TBTF bank they're taking it over - it's an administrative nightmare, and the banks have captured the regulators.
So if a bank gets weak, markets will keep extending credit as long as there's a government backstop, and it won't get taken over, and management will keep playing double or nothing with taxpayers' money.
And then if I'm a bank manager, I'm going to borrow as much as possible, and do a lot of high-risk, high return type trading, if it works out I make a ton of money, if I lose it's the government's problem.
Finally, it's not that likely for a Treasury official to tell a TBTF bank they're taking it over - it's an administrative nightmare, and the banks have captured the regulators.
So if a bank gets weak, markets will keep extending credit as long as there's a government backstop, and it won't get taken over, and management will keep playing double or nothing with taxpayers' money.
We have a structural problem, when things are "too big to fail", the normal democracy does not work anymore, the bank gets too powerful on its own and goverments can't regulate it effectively.
Moreover, bigger companies are not necessarily more efficient. A smaller company (or country) has the agility of a shorter decision chain.
Moreover, bigger companies are not necessarily more efficient. A smaller company (or country) has the agility of a shorter decision chain.
Temporary nationalization of banks was suggested in 2008, but the idea is not politically viable on the right in the US.
It costs a lot less to save a small bank than a big bank, and the risk is spread out over multiple organisations. If we had (for example) small banks that were more specialised, if the housing market falls through, those sorts of investment banks would disappear, but others should stay relatively untouched. That was the whole point of Glass-Steagal : if the investors mess up, at least make sure that we don't have to wipe out Grandma's savings.
The sums of debt some of these banks got into swamped their share value, and in some countries were a fair chunk of the GNP. But I certainly wish we had removed shareholders from any bailed out bank.
One issue is some banks were on the border on if they needed bailing out, and shareholders might prefer the risk of catastrophic failure than taking a bailout which would lose them their shares.
One issue is some banks were on the border on if they needed bailing out, and shareholders might prefer the risk of catastrophic failure than taking a bailout which would lose them their shares.
It's like asking why we don't let a structurally unsound skyscraper just go bust. Not a problem in isolation, but not really safe in the midst of a crowded city block.
>The large banks are (arguably) more efficient because of economies of scale, eg. less duplicated management
Someone has never worked in a large bank before.
Someone has never worked in a large bank before.
The proposal should be extended to all "too big" companies.
Big companies combine the worst characteristics of state-owned and privately-owned enterprises.
On one hand, large amount of small shareholders makes them similar to state owned companies (in which everyone is a shareholder) with all the associated bureaucracy, parasitic management class, pathological incentives etc.
On the other hand, being private they lack even the weak control mechanisms that democratic societies impose on state-owned companies.
Big companies combine the worst characteristics of state-owned and privately-owned enterprises.
On one hand, large amount of small shareholders makes them similar to state owned companies (in which everyone is a shareholder) with all the associated bureaucracy, parasitic management class, pathological incentives etc.
On the other hand, being private they lack even the weak control mechanisms that democratic societies impose on state-owned companies.
An analogy:
Bank runs are like forest fires. If you prevent all the small ones, eventually you get a giant one that's too big to stop.
Bank runs are like forest fires. If you prevent all the small ones, eventually you get a giant one that's too big to stop.
Next time they blow up just let them all burn to the ground.
The people in charge are too afraid we'll go all "Lord of the Flies" on them without the banking system to motivate us into productivity.
Suppose JPM/Chase had failed. The day after, there would be no cash in the ATMs (unless the government stepped in). The USA would be in a Lord of the Flies situation very rapidly. And we wouldn't be interested in the bank bosses, we'd be interested in food.
Another interesting way to think about "too big to fail" is as a considerable government subsidy. Banks operate in a risky environment. When there's a meltdown, the government steps in to bail the largest banks out. These banks are getting a free insurance policy from the government, a subsidy that's not going to the smaller banks.
The word 'meltdown' is apt.
[Price–Anderson Nuclear Industries Indemnity Act] http://en.wikipedia.org/wiki/Price%E2%80%93Anderson_Nuclear_...
[Price–Anderson Nuclear Industries Indemnity Act] http://en.wikipedia.org/wiki/Price%E2%80%93Anderson_Nuclear_...
We already know how. The political will just isn't there.
Bullshit. If you're talking about the American people, the political will is there in spades. But thanks to gerrymandering and the filibuster, their voices been successfully nullified. The GOP holds the House by a wide majority, even though their members in it received fewer votes than the "minority" in opposition. And while the GOP has a numerical minority in the Senate, they still control the chamber since it (alone in the developed world) runs on a self-imposed Supermajority rule, not a simple majority.
These two departures from basic democratic control have freed the legislative body from proper accountability to the people, rendering the will of the people increasingly irrelevant to the operations of the government. Saying political will "is just not there" like this is some sad but immutable fact of life ignores the reality of the situation: America has suffered an unofficial coup. We are now suffering under an intrinsically illegitimate government that preserves its power thanks to very clear, very precise structural problems that have been magnified enough to effectively hinder the legitimate will of the people.
These are facts, and they are neither debatable nor acceptable. The situation must resolve itself and it must do so in favor of the people.
These two departures from basic democratic control have freed the legislative body from proper accountability to the people, rendering the will of the people increasingly irrelevant to the operations of the government. Saying political will "is just not there" like this is some sad but immutable fact of life ignores the reality of the situation: America has suffered an unofficial coup. We are now suffering under an intrinsically illegitimate government that preserves its power thanks to very clear, very precise structural problems that have been magnified enough to effectively hinder the legitimate will of the people.
These are facts, and they are neither debatable nor acceptable. The situation must resolve itself and it must do so in favor of the people.
Vote totals for the bailout:
Aye: 171 D, 91 R. Nay: 63 D, 108 R.
http://www.opencongress.org/bill/110-h1424/show
Why are you complaining about the GOP holding the house? Based on their votes, they seem to be the party of letting banks pay for their mistakes.
Aye: 171 D, 91 R. Nay: 63 D, 108 R.
http://www.opencongress.org/bill/110-h1424/show
Why are you complaining about the GOP holding the house? Based on their votes, they seem to be the party of letting banks pay for their mistakes.
Why are you citing a vote from 2008 in reference to the Congress that was just elected in 2012?
I cited it because I don't believe the Republican position has changed.
Do you disagree? Perhaps Republicans hate the Tea Party so much that they decided to support bailouts just to spite them?
Do you disagree? Perhaps Republicans hate the Tea Party so much that they decided to support bailouts just to spite them?
Um, the Bailout Bill was signed by George W. Bush - a Republican approving the work of his own cabinet.
The bailout wasn't the issue, by the way. Faced with a catastrophic crisis, propping up a criminal enterprise that we are utterly dependent upon is very much a lesser of two evils choice. The real problem is with sparing these bastards from even a hint of prosecution after the fact.
If you want a more accurate view of where the GOP stands today, consider Eric Cantor (i.e. their leadership) who actively courted Wall Street during the election, promising that the Republicans would provide "better service" and getting a highly disproportionate of the bribes (ahem) contributions in return.
And don't get me started on Elizabeth Warren. She was actively and articulately opposed to the criminal class that's developed in banking. And the agency she designed (the CPFB) was the target for the most vitriolic rage that the House Republicans have managed to date, and that's saying something, given who we're dealing with.
The bailout wasn't the issue, by the way. Faced with a catastrophic crisis, propping up a criminal enterprise that we are utterly dependent upon is very much a lesser of two evils choice. The real problem is with sparing these bastards from even a hint of prosecution after the fact.
If you want a more accurate view of where the GOP stands today, consider Eric Cantor (i.e. their leadership) who actively courted Wall Street during the election, promising that the Republicans would provide "better service" and getting a highly disproportionate of the bribes (ahem) contributions in return.
And don't get me started on Elizabeth Warren. She was actively and articulately opposed to the criminal class that's developed in banking. And the agency she designed (the CPFB) was the target for the most vitriolic rage that the House Republicans have managed to date, and that's saying something, given who we're dealing with.
I didn't say opposition to bailouts was unanimous among Republicans, merely that the majority opposed them.
As for "criminal enterprise" and "prosecution", could you remind me what crime was committed, and by whom? Last I checked, taking a long position on housing (the cause of the crisis) wasn't a crime. If it was, we need to jail every homeowner.
Keeping Elizabeth Warren out of the public policy arena is a fantastic move. She is driven primarily by ideology, and displays a remarkable ability to state correct facts in a manner that misleads reporters and the public. See, for example, her nonsensical claims that medical costs cause millions of bankruptcies, or her confusing presentation of data in the "Two Income Trap" which obscures the fact that the primary cause of the two income trap is taxes.
As for "criminal enterprise" and "prosecution", could you remind me what crime was committed, and by whom? Last I checked, taking a long position on housing (the cause of the crisis) wasn't a crime. If it was, we need to jail every homeowner.
Keeping Elizabeth Warren out of the public policy arena is a fantastic move. She is driven primarily by ideology, and displays a remarkable ability to state correct facts in a manner that misleads reporters and the public. See, for example, her nonsensical claims that medical costs cause millions of bankruptcies, or her confusing presentation of data in the "Two Income Trap" which obscures the fact that the primary cause of the two income trap is taxes.
> See, for example, her nonsensical claims that medical costs cause millions of bankruptcies,
It is "common knowledge" that medical costs drive bankruptcies so I'm surprised to hear you say this; but of course, I know that "common knowledge" is often wrong. Can you explain how medical costs don't actually often result in bankruptcy?
(This is not an attempt at a sarcastic troll--I think you often, but not always, do have correct contrarian opinions, I just don't know what this one is.)
It is "common knowledge" that medical costs drive bankruptcies so I'm surprised to hear you say this; but of course, I know that "common knowledge" is often wrong. Can you explain how medical costs don't actually often result in bankruptcy?
(This is not an attempt at a sarcastic troll--I think you often, but not always, do have correct contrarian opinions, I just don't know what this one is.)
It has been "common knowledge" ever since Warren pushed a study claiming it during election season.
The gist of the flaw is this:
However, she used verbiage hinting that P(medical cause | bankruptcy) x # of bankruptcies = # of medical bankruptcies (do the math - it's not). A bunch of innumerate reporters read the verbiage and ignored the math, leading this "fact" to become "common knowledge".
The claim may or may not be true - I don't know of good data on it. But all Warren did was deliberately confuse the issue to support her political allies.
See also http://www.theatlantic.com/business/archive/2009/06/elizabet...
The gist of the flaw is this:
# Medical bankruptcies = # of bankruptcies x [P(bankruptcy | medical cause) - P(bankruptcy | no medical cause)] x P(medical cause)
However, she used verbiage hinting that P(medical cause | bankruptcy) x # of bankruptcies = # of medical bankruptcies (do the math - it's not). A bunch of innumerate reporters read the verbiage and ignored the math, leading this "fact" to become "common knowledge".
The claim may or may not be true - I don't know of good data on it. But all Warren did was deliberately confuse the issue to support her political allies.
See also http://www.theatlantic.com/business/archive/2009/06/elizabet...
Oh for god's sake. Are you really that uninformed about the crash? Do you honestly think it was simply banks "going long"? Tell you what, if it's an education you're after, see "Inside Job". It's right here, free and legal, for your convenience: http://vimeo.com/54817244.
For someone who knows as little about what actually happened as you appear to, it's probably the best crash course available.
For someone who knows as little about what actually happened as you appear to, it's probably the best crash course available.
As I expected, you can't even articulate what crime you think was committed.
You are correct. The scale of your ignorance combined with the depth of your obliviousness to it rendered me speechless. Should you actually have any curiosity here (which I suspect you don't), you'll find that the resource I provided offers a view vastly more comprehensive than any one person could include in a single HN post.
And not being one to suffer fools gladly, referring you to a comprehensive account of multiple, interlocking frauds spanning a variety of institutions spares me the effort of engaging with someone displaying a Creationist's level of epistemic closure. This particular discussion of rampant corruption and outright criminal conduct (fraud, mostly) has the added benefit of being a very high profile account. It has been widely circulated, closely examined, and generally accepted as a fair and accurate assessment. This level of exposure means you'll have an easy time verifying the claims, should you choose to do so (which, ha).
In the meantime, I'm going to go back to being amazed that someone discussing this in 2013 can do so without appearing to know what a derivative is, let alone how one works.
And not being one to suffer fools gladly, referring you to a comprehensive account of multiple, interlocking frauds spanning a variety of institutions spares me the effort of engaging with someone displaying a Creationist's level of epistemic closure. This particular discussion of rampant corruption and outright criminal conduct (fraud, mostly) has the added benefit of being a very high profile account. It has been widely circulated, closely examined, and generally accepted as a fair and accurate assessment. This level of exposure means you'll have an easy time verifying the claims, should you choose to do so (which, ha).
In the meantime, I'm going to go back to being amazed that someone discussing this in 2013 can do so without appearing to know what a derivative is, let alone how one works.
The guy you just said didn't know what a derivative is used to workas a quant.
Knowing the limits of my own knowledge, I was careful to say "appears".
But honestly, that only makes him even more dishonest. After all, he was saying that there was no real difference between banks involved in the subprime crisis and any homeowner "going long" with a bet on rising home prices. Except that there's a world of difference between placing a bet on a specific piece of tangible property in an open, regulated market, and placing bets of derivations from that market so far removed that they have no clear connection to reality. And he, of all people, should know it.
This refusal to see how cynically the inputs for financial models were being manipulated supports my view that many of the quants who played a key role in this mess had no idea who or what they were working with, that they were oblivious to the fraud and corruption engulfing the firms that employed them, and that they failed to register what would happen when things like fraudulent AAA ratings on securities found their way into a system. Among a broader class of market observers this blindness was attributed to a quasi-religious belief in efficient market theory, rejected the possibility of fraud out of hand.
The basic problem can be summarized as mistaking the map for the territory. In this case, the map was the Black-Scholes Equation. Or rather, the source of the maps was this formula. People who learned to model various risks to determine prices without properly understanding the equation's limits (there were many of both) ended up with catastrophically misguided decisions to their credit.
For a bit more background on all this, see here: http://www.guardian.co.uk/science/2012/feb/12/black-scholes-...
If there's one thing that 'Inside Job' makes clear, it's that the policy framework that governs markets is absolutely critical to their stability and value. In America, this framework was subverted by the rise of an ideological (again, quasi-religious) form of market theory that say deregulation as both a practical and moral virtue. This was deep tissue corruption, and as it found its way into the laws that governed market players (or failed to govern, as the case may be), it opened the door to a cascade of fraud - people deliberately describing X as Y.
Like a ever-growing fog (toxic cloud, really) this continued until none of the major players had any idea what positions their counterparties were in. Knowing how fraudulent their own positions were, they had every reason to fear the worst from others in the same game. And then, on one horrible day in September, the music finally stopped.
To put it in very crude terms, a system built around bullshit eventually choked on the stuff. I'm not surprised that a person who shared more responsibility than most for the resulting catastrophe would respond by entering a state of deep denial. But it's sad, nonetheless.
But honestly, that only makes him even more dishonest. After all, he was saying that there was no real difference between banks involved in the subprime crisis and any homeowner "going long" with a bet on rising home prices. Except that there's a world of difference between placing a bet on a specific piece of tangible property in an open, regulated market, and placing bets of derivations from that market so far removed that they have no clear connection to reality. And he, of all people, should know it.
This refusal to see how cynically the inputs for financial models were being manipulated supports my view that many of the quants who played a key role in this mess had no idea who or what they were working with, that they were oblivious to the fraud and corruption engulfing the firms that employed them, and that they failed to register what would happen when things like fraudulent AAA ratings on securities found their way into a system. Among a broader class of market observers this blindness was attributed to a quasi-religious belief in efficient market theory, rejected the possibility of fraud out of hand.
The basic problem can be summarized as mistaking the map for the territory. In this case, the map was the Black-Scholes Equation. Or rather, the source of the maps was this formula. People who learned to model various risks to determine prices without properly understanding the equation's limits (there were many of both) ended up with catastrophically misguided decisions to their credit.
For a bit more background on all this, see here: http://www.guardian.co.uk/science/2012/feb/12/black-scholes-...
If there's one thing that 'Inside Job' makes clear, it's that the policy framework that governs markets is absolutely critical to their stability and value. In America, this framework was subverted by the rise of an ideological (again, quasi-religious) form of market theory that say deregulation as both a practical and moral virtue. This was deep tissue corruption, and as it found its way into the laws that governed market players (or failed to govern, as the case may be), it opened the door to a cascade of fraud - people deliberately describing X as Y.
Like a ever-growing fog (toxic cloud, really) this continued until none of the major players had any idea what positions their counterparties were in. Knowing how fraudulent their own positions were, they had every reason to fear the worst from others in the same game. And then, on one horrible day in September, the music finally stopped.
To put it in very crude terms, a system built around bullshit eventually choked on the stuff. I'm not surprised that a person who shared more responsibility than most for the resulting catastrophe would respond by entering a state of deep denial. But it's sad, nonetheless.
"yummyfajitas" may have been a quant, but if he's at all sincere about the questions he's asking, he's still a blithering idiot, and deeply dishonest to boot - with himself, if no one else. Here's more on the massive criminal fraud that he failed to see swirling all around him (unsurprising, perhaps, given the source of his paychecks).
http://www.pbs.org/wgbh/pages/frontline/business-economy-fin...
http://www.pbs.org/wgbh/pages/frontline/business-economy-fin...
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Give me a break. The whole point of the banking system is to concentrate capital into a handful megacorps. When you have thousands of little competitors, profit plummets and risk increases enough to make banking not a viable business anymore.
Heck, that's how banking started. A handful Venetian traders got so rich they started lending money.
Heck, that's how banking started. A handful Venetian traders got so rich they started lending money.
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The banks will never let this happen. The banks have become too powerful.
Start the Bank of the United States, cancel FDIC insurance.
There problem solve.
There problem solve.
We tried that. Our country has had great difficulty with central banking in the past, and today. Entire books have been written on this topic, if you wish to learn more, I'd start with the history of the First and Second bank of the United States.
https://en.wikipedia.org/wiki/First_Bank_of_the_United_State... https://en.wikipedia.org/wiki/Second_Bank_of_the_United_Stat...
https://en.wikipedia.org/wiki/First_Bank_of_the_United_State... https://en.wikipedia.org/wiki/Second_Bank_of_the_United_Stat...
The East Asian economic miracle is all about the state in control of the banks (printing).
Read Quest for Prosperity -- the private/public construct of distinction is a complete myth that is exposed by the titans in Asia and Latin America. The more we stick to the myth in the US, the longer it will take for us to have the same degree of success. Innovation comes not out of motive for profit, but ou of need and desire and capability.
Read Quest for Prosperity -- the private/public construct of distinction is a complete myth that is exposed by the titans in Asia and Latin America. The more we stick to the myth in the US, the longer it will take for us to have the same degree of success. Innovation comes not out of motive for profit, but ou of need and desire and capability.
I agree that a sovereign nation shouldn't be borrowing from anybody in order to trade with other nations, but isn't the Asian economic miracle also driven by slave labor?
> The East Asian economic miracle is all about the state in control of the banks (printing).
So was the Asian Financial Crisis. And to a lesser extent Japan's "lost decades".
There are no simple answers in economics. Everything comes with ugly drawbacks.
So was the Asian Financial Crisis. And to a lesser extent Japan's "lost decades".
There are no simple answers in economics. Everything comes with ugly drawbacks.
FDIC is a form of privatizing the profit, while socializing the risks for the banks.
The FDIC is funded by banks. The FDIC did not have to use taxpayer dollars during the financial crisis. In practice, the FDIC has not been involved in these socialized risks you speak of, though if it ran out of money, the government would back it up.
The FDIC also provides public benefits, like avoiding economy-crippling bank runs.
It's a good thing.
The FDIC also provides public benefits, like avoiding economy-crippling bank runs.
It's a good thing.
The FDIC is bailed out by the taxpayer, so does the private banks. It's a nothing but socializing the risks, while privatizing the profits. It's immoral.
China does things right here, when it fails due to your corruption, you get executed, instead of bailed out.
China does things right here, when it fails due to your corruption, you get executed, instead of bailed out.
The FDIC has never been bailed out, and as I pointed out, there are plenty of public benefits to that government guarantee. We would be less wealthy as a society without it.
Yes
BUT it's also a form of "insurance". If there's a suspect a bank won't be able to honor deposits, bank run ensues, THEN the given bank can't honor deposits obviously, because no bank works like that today, that is: self fulfilling prophecy
It's a necessary evil (for the customer's sake)
BUT it's also a form of "insurance". If there's a suspect a bank won't be able to honor deposits, bank run ensues, THEN the given bank can't honor deposits obviously, because no bank works like that today, that is: self fulfilling prophecy
It's a necessary evil (for the customer's sake)
If you don't trust the bank, don't put your money there. Otherwise, put your money at the Bank of the United States, backed by and owned by the full faith of the US taxpayer.
I will not bail out private money making banks via the FDIC via my tax dollar.
If you put money into a private bank, then when it fails, you should lose that money.
I will not bail out private money making banks via the FDIC via my tax dollar.
If you put money into a private bank, then when it fails, you should lose that money.
I will not bail out private money making banks via the FDIC via my tax dollar.
Never in American history has the FDIC had to take a "tax dollar" during a bank failure. The government does back it, yes--but the amount of private money in the FDIC makes it extremely unlikely that bank failures even at the scope we were looking at in 2008 will tap them out.
Never in American history has the FDIC had to take a "tax dollar" during a bank failure. The government does back it, yes--but the amount of private money in the FDIC makes it extremely unlikely that bank failures even at the scope we were looking at in 2008 will tap them out.
Credit unions don't participate in FDIC insurance, they have arranged their own private insurance. So it is not a necessary evil.
Credit unions participate in the NCUA, which is decidedly not private.
http://www.ncua.gov/Pages/default.aspx
http://www.ncua.gov/Pages/default.aspx
Sorry, you are right, I didn't realize it was a federal agency, I thought it was something they had arranged amongst themselves.
Insurance is a necessary evil, if it's backed by the government or by a pool of banks is a different issue
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If we call for BitCoin as the solution, The Federal Reserve will fight us, using our money, to make it the villan in the narrative. If we call the division of banks as the solution, the federal reserve will support it, because gigantic entities have clout in resisting the parasitic nature of the Federal Reserve, where minor banks would have to suffer what they must.
Whatever we do, the parasites who can print and dilute our currency through systematic inflation must be appeased and satisfied, or else they will inject poison into the entire system as a retaliation for trying to remove the blood sucking parasite. The bitcoin angle won't work.
Whatever we do, the parasites who can print and dilute our currency through systematic inflation must be appeased and satisfied, or else they will inject poison into the entire system as a retaliation for trying to remove the blood sucking parasite. The bitcoin angle won't work.
The robo-signing debacle[2] has demonstrated amply that the financial sector can't be bothered to verify their data before destroying the lives of thousands of people.
The LIBOR manipulation scandal[3] proves that even the industry's own measuring rods are bent and unreliable.
The last 5 years have revealed an industry rife with crime, deceit, and unabashed greed which has severely damaged the global economy and the quality of life for hundreds of millions of people. And the penalties for these actions pale in proportionate comparison to those imposed on a street-level drug dealer.
When a private enterprise becomes too essential to regulate effectively, it endangers the society in which it operates. Breaking it up into manageable chunks is the only viable option.
[1]: https://www.nytimes.com/2013/01/03/opinion/how-bankers-help-...
[2]: https://en.wikipedia.org/wiki/2010_United_States_foreclosure...
[3]: https://en.wikipedia.org/wiki/Libor_scandal