While Paul Krugman has seemed to go against the rising tide of experts calling for the giant banks to be broken up, he clarified his position last week:
My view is that I’d love to see those financial giants broken up, if only for political reasons: it’s bad to have banks so big they can often write laws.
Bingo!
The giant banks have enough money to – literally – purchase the politicians.
And they can capture the regulators. As Dean Baker wrote on April 7th:
In the United States it will always be easy for regulators to look the other way, even when the ultimate consequences prove to be disastrous. By contrast, cracking down on politically connected banks is difficult for regulators. The banks’ executives will call their friends in the administration and Congress to complain about the crazy regulator who is trying to keep them from running their business.
And, you can be sure that the banks will have a story. They pay smart people lots of money to develop those stories. The banks’ mouthpieces will make a conscientious regulator look like a crazed vigilante who just doesn’t understand modern finance. Just ask Brooksley Born, the head of the Commodities Futures Trading Commission who was stopped in her effort to regulate credit default swaps back in 1998.
And as Miles Mogulescu writes:
[Simon] Johnson has the long-term politics right–unless we break up the 6-8 largest banks which dominate the financial system, we will both be strengthening a self-perpetuating oligarchy which dominates the political system to protect its own wealth and power to the detriment of the national interest and democratic governance, and which uses it’s government guaranteed “too big to fail status” to take excessive risk which will lead to the next bubble, the next meltdown, and the next Hobson’s choice by an even more debt-ridden government between bailing them out again with trillions in taxpayer dollars or allowing them to fail and sinking the economy into depression.
***
TBTF is antithetical to democracy. Because of their TBTF competitive economic advantage, the largest banks have become even larger since the beginning of the Great Recession in fall 2008 and the 6 largest banks now control assets totaling over 60% of the country’s Gross Domestic Product. With this outsized control of the economy comes outsized control of the government. A bank with assets exceeding 2 trillion dollars can spend whatever it takes to influence elections and convince Congress to pass legislation that favors its interests rather than those of the vast majority of middle class voters, especially after the Supreme Court’s pernicious decision in the Citizens United case allowing unlimited election contributions by corporations. “Oligarchy” is a term Americans used to apply to countries like Russia and smaller third world countries, not to ourselves. But with TBTF, as Johnson and Kwak explain,
“The Wall Street banks are the new American oligarchy– a group that gains political power because of its economic power, and then uses that political power for its own benefit. Runaway profits and bonuses in the financial sector were transmuted into political power through campaign contributions and the attraction of the revolving door. But those profits and bonuses also bolstered the credibility and influence of Wall Street; in an era of free market capitalism triumphant, an industry that was making so much money had to be good, and people who were making so much money had to know what they were talking about. Money and ideology were mutually reinforcing.This is not the first time that a powerful economic elite has risen to political prominence. In the late nineteenth century, the giant industrial trusts — many of them financed by banker and industrialist J. P. Morgan — dominated the U.S. economy with the support of their allies in Washington, until President Theodore Roosevelt first used the antitrust laws to break them up.”
So, argues Johnson, to preserve democracy, and to prevent the next bubble, meltdown and bailout,
“Make our largest banks small enough to fail. There is simply no other way to really end the problem of ‘too big to fail.'”
I disagree with Krugman on the technical arguments for breaking up the giant banks. For example, I believe that the economy will never stabilize and derivatives will never be transparent until the too big to fails are broken up.
But I applaud and welcome Krugman’s clarification that he would like the giant banks to be broken up so that they cannot continue to dominate the political process.
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Does Krugman’s simplified version of the argument really hold water? Given the massive ROI on buying politicians, how small would banks have to be for this activity to be uneconomic? This is quite different from breaking up oligopoly businesses on anti-trust grounds, using the bully pulpit to call out abusive lobbying practices, or ceasing to regard Wall Street execs as modern philosopher kings–none of which requires new laws.
That worked so well for campaign contribution limits. Thank goodness “bundlers” never developed.
And that whole Standard Oil problem? Completely resolved.
Cage or eliminate the hydra, don’t dress it up as a cute little sailor and pretend it’s going to behave itself.
SIFMA just captured another squid lobby/drug dealer to help front-run regulation… who could have guessed that SIFMA would be looking for ways to re-design lobbying for wall street meth? Oh good, you know the rules, now let’s go change them around and pretend like our meth and heroin cocktails are safe….
See: http://online.wsj.com/article/SB10001424052702304180804575188372821609594.html?mod=WSJ_latestheadlines
Richard Dorfman resigned Friday as president and chief executive officer of the Federal Home Loan Bank of Atlanta to become a managing director at the Securities Industry and Financial Markets Association, or Sifma, a trade group in New York.
Mr. Dorfman, 64 years old, will head Sifma’s securitization group, which is seeking to revitalize the market for mortgages and other credits packaged into securities
Hey Thanks for offering this site…It really provides the reason President Obama desired that no one be be judicially held accountable for the economic crisis within his first few months of taking office….He didn’t want his Treasury to be tried and his buddy Sumner….and of course don’t get rid of Benankee….This bank regulation sham by both the President and the Congress are deplorable….in the words of the grasshoppers to the ants…”Do I (the taxpayers) look stupid?” Oh, just wait until election time you imcumbants….you better run but no place to hide….
Hope everyone saw this Bill Black video, which needs to be sent to every voter in America all year long !!!!!!
http://www.ritholtz.com/blog/2010/04/bill-blacks-eye-popping-statement-at-house-finserv-hearing-on-lehman/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+TheBigPicture+(The+Big+Picture)
Awesome video.
He ran the RTC which handled the S&L bank, and did an excellent job. They didn’t cost the US taxpayer one cent and worked with the FBI to throw thousands of crooked banksters in jail.
He was HATED by the Republicans and the Reagan administration while he did this. They tried to fire him.
Unfortunately for us, he’s probably got a snowball’s chance in hell of being hired by Obama to handle this crisis. And the Republicans and Teabaggers probably still want to throw him in jail for screwing them and supporting the American citizen.
A little correct here:
Cost of S&L crisis: $160 billion
Bill Black’s job: Litigation Director, Federal Home Loan Bank Board
Of course the same outcome can be accomplished by eliminating the government (i.e. move toward Libertarianism). I don’t really care if Citi or BA grows to monstrous proportions, what I care about is congress (and the FED) handing them money and legislation. Free markets don’t have to spell out who is a PD and who isn’t.
Without government interference, the derivatives issue would have solved itself in 2008.
Yeah, I’m sure that the banks would happily continue marking to market until their demise if they were free of any regulatory constraints whatsoever.
The banks can do what they like, let the counter-party decide the validity. That people trust a regulatory authority to do this for them is partly why we got to where we did.
Around here it seems there is a careful dichotomy attended to when learning from institutional failure. The failure of the banks over the past several years means they need to be stripped of some of their power (I would agree … the main power they need to lose is issuing credit in a currency with infinitely printable reserves), while the failure of the regulators means they need to be entrusted with more power.
The Fed is the ultimate TBTF bank.
As much as I’d like for it to be true, that’s not what he really said.
He basically blew it off as before, but this time in a different tone: “In a perfect world, I’d like to agree with the naive hippies who want to break up the banks, if only for political reasons (because we know how mindless and emotional the peasants are about the cosmetics of this)”.
He also seems ashamed to continue with his previous straw man about Break-up-the-TBTFers wanting only to do that, thinking it would be sufficient. I guess he’s been slammed so much on that lie that he’s scared to keep telling it.
So instead he continues with the party line, but his new scam is to say there’s three options, none of which accurately represent the Smash the Rackets position.
He says there’s the Republican way (which boils down to doing nothing), some fuzzy depiction of wanting to return to the pre-deregulation status quo ante (an option which I don’t recognize in any prescription I’ve seen, and which Krugman intentionally depicts as weak so he can then argue it’s too weak), and then his preferred plan, i.e. the Obama/establishment Dem plan, which would also do nothing, while pretending to “regulate” and in practice would even extend the Bailout over the very “shadow banking” scams he’s been claiming all along are the real danger. It sounds like he even wants to bring the full casino under the FDIC’s wing!
He also repeats one of the favorite lies of the corporate liberals, that the crimes of today are now laws of the universe. “Shadow banking is here to stay…you can’t undo it”, is a paraphrase.
In the end he’s telling the same lies and advocating the same scam, he’s just changed the tone and some of the rhetoric.
What do you expect, man? Krugman is obviously part of elite.
I believe the “hobson’s choice” expression in your post is misused. If you read the wiki page, it’s more of a “take it or leave it” rather than option between 2 tough choices.
Morton’s fork seems better appropriated (choice between 2 bad outcome) – “between a rock and a hard place”
Breaking up the banks because of their political influence is a good enough reason to break them up. But Krugman’s falling into a backward-looking trap if he thinks that’s the ONLY reason to break them up.
Many of the biggest banks in the world are ….Asian and European. Breaking up the US banks will enable these other banks to seize market share and dominate much business. I’d argue this is systemically more dangerous because then you are subject to the risk of regulatory capture in Germany / Spain / China / Japan. The truth is that there is vigorous competition in the banking industry. That’s why banks tend to take on more risk – because the returns from much banking activity is too low. (Why do you think IKB was investing in American subprime?)
Yes, but then Asian and European taxpayers would be responsible for the next round of bank bailouts.
“American” companies such as GE pay no US taxes but were allowed to issue debt backed by the FDIC. Others incorporated in the Caribbean to avoid taxes. In others worlds, we bailed out companies that _currently_ have no loyalty to the US.
Let the rest of the world pay for the next crash.
Exactly. The current choice is to vote out all of the bums between now and 2012. If the people itself are politically weaker than the bankers than that will leave only one other solution but I am not overly concerned. I think we will solve this politically but have one hell of a mess to clean-up afterward. The foreign creditors are not going to be pleased when the time comes.
The reason I say we will solve this politically is that the perps already have or are making their exits. Two examples are Jamie Dimon of JPM and Senator Chris Dodd. It doesn’t mean we all stop dancing and exposing the corruption of such, it means that the obstacles to reform are individuals that made illicit gains over the last twelve years and leaving, knowing the people are waking up to the bezzle. I think we will begin to see criminal prosecutions in 2011, the low level type of course.
Regulatory arbitrage is a real issue, I agree. But as an argument for not breaking up the banks, it is akin to saying “don’t put burglars in jail, because if you do, new burglars will just move in from out of town”.
The USA is in a position to take the lead on this issue in the G20, promoting commensurate regulation around the world. For example, if you have been watching what’s going on in the UK, you’d have seen a strong interest in similar regulation there.
Krugman’s tautology: Krugman doesn’t believe breaking up the TBTF banks will effect the technical issues and fraud being blamed for the crisis and has expressed a “that’s just the way it is” attitude about certain Wall Street “facts on the ground” i.e. the implicit guarantee that capitalism will always be saved when it fails. But he agrees that TBTF institutions pretty much write the legislation that allows for the fraud/destabilization and for that reason thinks the cartel should be broken up.
He just can’t admit, or won’t admit, that whatever legislation emerges from the Democrats is likely to be wholly inadequate. Mind you, I’ve never voted for a Republican in my life… but I gave up my partisan support for the Dems two decades ago. Apparently, Krugman would rather compromise his integrity. Go figure…
Just heard a little bit of TRUTH coming out of NPR’s “Marketplace.org.” show.
Usually they are PWNED. This was therefore utterly startling. Here’s what I heard:
Senate’s regulation bill omits 3 reforms
The Senate is expected to start a floor debate on financial reform soon. Commentator Robert Reich says the bill under consideration is a good start, but lacks some important reforms.
KAI RYSSDAL: I know we said this often during the health care debate. And it turned out often not to be true. But it does kind of feel like things are reaching a turning point in Congress. Over financial reform this time. Senate Banking Committee Chairman Christopher Dodd says he is looking to start a floor debate on reform tomorrow.
Commentator Robert Reich says the bill that’s under consideration is a good start.
ROBERT REICH: The real scandal isn’t the Street’s unlawful acts, such as Goldman Sachs’s alleged fraud, but legal acts that have reaped the Street a bonanza and nearly sunk the rest of us.
The bill now being considered in the Senate is a step in the right direction. But it omits three of the most important reforms.
First, it should require that all derivatives, that is bets on future asset prices, be traded on open exchanges where parties have to disclose what they’re buying and selling and have enough capital to pay up if their bets go wrong. The exception in the current bill for so-called “customized” derivatives opens a loophole big enough for bankers to drive their Ferrari’s through.
Second, the bill should resurrect the Glass-Steagall Act in its entirety so commercial banks are separated from investment banks. The current bill doesn’t go nearly far enough. Commercial banks shouldn’t be investing in the stock market, and investment banks shouldn’t be taking in deposits. We learned this after the Great Crash of 1929, and then forgot it in 1999 when Glass-Steagall was repealed because Wall Street wanted to create financial supermarkets.
Third, the bill should cap the size of big banks at no more than $100 billion in assets. The current bill doesn’t limit the size of banks at all. It creates a process for winding down the operations of a bank that gets into trouble. But if several big banks are threatened, as they were when the housing bubble burst, they’d almost certainly be bailed out. And knowing this they’ll take bigger risks than they should. The only way to ensure no bank is too big to fail is to make sure no bank is too big, period.
Wall Street doesn’t want these reforms because they’d cut deeply into profits, and is using its formidable lobbying clout with both parties to prevent even a decent discussion of them. It’s time for Main Street — Tea Partiers, coffee partiers, and beer drinkers — to be heard.
RYSSDAL: Robert Reich is a professor of public policy at the University of California, Berkeley.
http://marketplace.publicradio.org/display/web/2010/04/21/pm-financial-reform-reich-commentary/
ROBERT REICH — hallelujah, hallelujah, hallelujah!
I have been waiting to hear these words of wisdom SOMEWHERE in the mainstream for so long.
Bring back Glass-Steagall!
Break up the banks!
And if there have to be derivatives, do SOMETHING to make them less the financial WMDs they are now.
Congress and newspeople keep been acting like these measures are not desperately needed.
First step to cleaning up corruption is to stop having it be LEGAL to Enronize all of us!
Best bit I’ve ever heard on marketplace. EVER.
(My comment at NPR on the piece)
“But I applaud and welcome Krugman’s clarification that he would like the giant banks to be broken up so that they cannot continue to dominate the political process.”
Krugman ignores the obvious solution. Take away from the federal government the power to meddle with the markets and there would be no incentive for the banks to dominate the political process.
I used to think size was the most important issue. Now I’m more inclined to think that incentives matter more.
Let’s say we’re in 2000 and there are no big banks, only medium and small ones. With the incentives system in place every one of them would still go into the subprime ponzi. Every one of them would be insolvent. Could we let all of them fail at the same time?
We need incentives that would make a financier think twice before joining a ponzi frenzy. For now I don’t see anything that could be effective except clawbacks.
Let’s imagine the best case scenario with the current incentives system. I’m a trader at some financial institution that prides itself in encouraging employees to care about the long term. A substantial portion of my bonus, say 50%, is in company stock. If the firm fails I lose that. I still have an annual $500,000 salary and half my bonus in cash. There’s a ginormous ponzi going on, be it tech stocks or mortgages or whatever. It’ll probably last a few years. I dive headlong into it. For years I rake in multi-millions bonuses. Then the bubble pops, my company fails, my stock is worthless. I still have a few millions in cash at the bank, my cumulated salaries and half bonuses in cash. In a few years I’ve made more money than Joe-six-pack will see in a lifetime of toil. Was it worth joining the ponzi? You betcha!
The only way to stop that is total clawback.
Paul Krugman has defined his opinions regarding the TBTF’s. See http://www.nytimes.com/2010/04/12/opinion/12krugman.html
Again, he agreeing that, politically it’s a great move, but other more important regulations need to be in place.
My problem with Krugman and all the rest, left or right – has been their head-in-the-sand actions prior to 2007. There has been no political different between the two parties when it comes to Wall Street since Jack Kennedy.
Obama, who promised to overhaul NAFTA and Wall Street is just another puppet of the federal government/industrial complex. The american middle class MUST forego more anquish and hardship in order to cover the expense of welcoming in the global banking system.
Anyone who thinks this “just happened” is living in never-neverland.
how is rothschild involved?
See also Martin Wolf’s latest:
http://www.ft.com/cms/s/0/f2e4dbb0-4caa-11df-9977-00144feab49a.html
He writes, in reference to financial reform:: “The more aware of the risks one is, the more obvious it becomes that radicalism is the safer option.”
Under the circumstances the ‘break up the banks’ schtick is just a red herring or sideshow. The problem is the toxic waste in the bond market. Until that is sloughed through the system, in about oh twenty years or so, major structural reworking in the financial sector is simply impossible. Not because it’s a bad idea, but because it would necessarily entail mark-to-market.
Why can’t we mark to market? Because it would take down the pension, life and health insurance industries. Not the banks! Take down health insurance and you take down the entire health care system.
Those who advocate a ‘big bang’, breaking up banks, the Swedish solution etc. are literally advocating vaporizing the invested premiums and collapsing the major insurers. Think about it for a minute. NOT….GOING….TO…..HAPPEN.
Ironic isn’t it, or perhaps evolutionary (a sort of Mutually Assured Destruction), but the ultrarich and furriners, and their banks, are just incidentally protected by the insane level of bond market risk and systemic exposure in the pension/insurance industries that our current ‘mega-Japan’ policy is walling off for the next 20-30 years.
Now shut up about breaking up banks and start talking about 30 years of zero real returns on all asset classes. What’s the best household savings percentage? How much GDP will it take to get there? Don’t states have to downsize by about 30% to survive–do we eliminate prisons, nursing homes or fish and wildlife permits? Where are the real questions being fleshed out?
TBTF…STFU. It’s over.
Allow the biggest fraud to go unpunished and unrectified, and just wait for the next party to get out of hand, it will bring romantic memories of the crash of 08.
TBTF….STFU or MANUP!!!
Skippy…Jim, agree with your prognosis but, when are we going to deal with these bastdards…eh…after their dead?
Jim, a truck could drive thru the holes in your argument.
If a Pension Fund is worth only 50% of its book value, when would you want to know? Now, or when you try to collect your pension?
When would you like to fix the problem, now, or when you are too old & doddery to tie your own shoes?
As for the Medical Insurance racket, for that is what it is, destroying it may be the best thing that ever happened to the USA!!
Capricorn, my argument is not that this is a good situation or even the best policy (although I do think it might be under the circumstances; I don’t know)…my argument is that major structural reform and the asset valuation that comes along with it is off the table. I am arguing simply that far too much time is being spent dragging over well-worn TBTF territory (because it feels good emotionally?) when it’s simply not relevant.
The pension funds are in the crosshairs. They are being artificially suspended by a fragile set of policies and bailouts as well as by temporarily legal accounting fraud. It won’t last but it does buy time to do something. This is my point: What should they do, what should households do? Have people adjusted their expected returns to net zero and started to get out of the bond market or not?
I guess trucks could drive to the heart of my ‘argument’ and load up on insight, too. Depends on whether the drivers know where they are headed.
The concerted push back against the SEC for its Civil Fraud claim against Goldman Sachs, as exemplified in Mayor Bloomberg’s criticism and the echoing charges on the cable business and news shows and the follow on by Congress, illustrates Baker’s point about how easy it is for regulators to look the other way until a complete disaster has occurred.
I’m not convinced about Too Big To Fail. It sounds nice in theory, but in practice a hundred medium sized banks will be much more difficult to regulate than six mega banks.
In the real world the two western banking systems that held up well during the latest crisis were Canada’s and Australia’s. Both countries had a tightly regulated oligopoly of four or five major banks. Maybe it’s time to start treating banks as if they were utilities. You don’t need 27 different power companies running around “competing” by blowing each other up, cutting deals with the mayor and routinely producing power surges that set half the town alight.