Many of us have pointed out that the economy will not stabilize until the too big to fails are broken up.
We have also pointed out that derivatives are still very dangerous for the economy, that the derivatives “reform” legislation previously passed has probably actually weakened existing regulations, and the legislation was “probably written by JP Morgan and Goldman Sachs“.
As I noted earlier this month:
Harold Bradley – who oversees almost $2 billion in assets as chief investment officer at the Kauffman Foundation – told the Reuters Global Exchanges and Trading Summit in New York that a cabal is preventing swap derivatives from being forced onto clearing exchanges:
There is no incentive from the moneyed interests in either Washington or New York to change it…
I believe we are in a cabal. There are five or six players only who are engaged and dominant in this marketplace and apparently they own the regulatory apparatus. Everybody is afraid to regulate them.
That’s bad enough.
But last week, Bob Litan of the Brookings Institute wrote a paper (here’s a summary) showing that – even if real derivatives legislation is ever passed – the 5 big derivatives players will still prevent any real change. James Kwak notes that Litan is no radical, but has previously written in defense in financial “innovation”.
Here’s a good summary from Rortybomb, showing that this is yet another reason to break up the too big to fails:
Litan is worried about the “Dealer’s Club” of the major derivatives players. I particularly like this paper as the best introduction to the current oligarchy that takes place in the very profitable over-the-counter derivatives trading market and credit default swap market. [Litton says]:
I have written this essay primarily to call attention to the main impediments to meaningful reform: the private actors who now control the trading of derivatives and all key elements of the infrastructure of derivatives trading, the major dealer banks. The importance of this “Derivatives Dealers’ Club” cannot be overstated. All end-users who want derivatives products, CDS in particular, must transact with dealer banks…I will argue that the major dealer banks have strong financial incentives and the ability to delay or impede changes from the status quo — even if the legislative reforms that are now being widely discussed are adopted — that would make the CDS and eventually other derivatives markets safer and more transparent for all concerned…
Here, of course, I refer to the major derivatives dealers – the top 5 dealer-banks that control virtually all of the dealer-to-dealer trades in CDS, together with a few others that participate with the top 5 in other institutions important to the derivatives market. Collectively, these institutions have the ability and incentive, if not counteracted by policy intervention, to delay, distort or impede clearing, exchange trading and transparency…
Market-makers make the most profit, however, as long as they can operate as much in the dark as is possible – so that customers don’t know the true going prices, only the dealers do. This opacity allows the dealers to keep spreads high…
In combination, these various market institutions – relating to standardization, clearing and pricing – have incentives not to rock the boat, and not to accelerate the kinds of changes that would make the derivatives market safer and more transparent. The common element among all of these institutions is strong participation, if not significant ownership, by the major dealers.
So Bob Litan is waving a giant red flag that the top dealer-banks that control the CDS market can more or less, through a variety of means he lays out convincingly in the paper, derail or significantly slow down CDS reform after the fact if it passes.
***
If you thought we’d at least get our arms around credit default swap reform from a financial reform bill, you should read this report from Litan as a giant warning flag. In case you weren’t sure if you’ve heard anyone directly lay out the case on how the market and political concentration in the United States banking sector hurts consumers and increases systemic risk through both political pressures and anticompetitive levels of control of the institutions of the market, now you have. It’s not Matt Taibbi, but it’s much further away from a “everything is actually fine and the Treasury is in control of reform” reassurance. Which should scare you, and give you yet another good reason for size caps for the major banks.
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It gives the Obama administration another excellent reason to control the size of the banks too. Good thing we’re all gearing up for financial reform right soon now, and that will be a primary focus of any… oh wait.
To take a devil’s advocate position, one might argue that other countries have ultra-large banks. If economic wars are the wars of the future, much economic warfare is conducted through banks’ guerilla evil services.
Ultra-large banks may be able to perform such services either uniquely or more efficiently, then you definitionally need super-big banks to be arms of your own national government with imperialistic tendencies. Breaking them up is not even, in this interpretation of reality, a benefit to society. Citigroup went some way to disprove this position, but they were plagued with a million other problems. They aren’t a great reference case.
Indeed, other organs of the state like JPM, Blackwater, and GM (Toyota hack-job, anyone?) might be convincing some very relevant individuals that this corporatism thing really has something going for it.
Do other countries have ultra large banks that are not part of the government? I think we are exceptional in that we privitize the profits of banks and now socialize the losses. I don’t believe that banks conduct economic warfare. I believe that in America’s case it was and is done by the government and corporations to all those countries we have troops stationed in (low cost resources, cheap labor supply and compliant consumers). Banking is just one of the services that ties it all together (especially imperialistic with that Reserve Currency thing).
Thanks for the posting George.
UBS, ICBC, Mitsubishi UFJ, Landsbanki, and others might be modern international examples of large banks that aren’t(or weren’t) formally part of the government. In some cases, these banks are larger relative to their government than our banks are relative to ours.
But you bet banks conduct financial and economic warfare, and so do countries. Attacks on weak trading positions are a constant phenomenon, with lots of famous successful financial attacks with geopolitical ramifications, from Keynes’ work on the peseta, to Soros on the pound, to the takedown of LTCM. Have you followed the discussion here about Magnetar, and how significant the actions taken there were on the economy as a whole?
A fun lecture on the matter by Paul Bracken from Yale. Frankly, and I hate our imperialistic and corporatist tendencies, I think any self-respecting paranoid control freak of a government would be loony to neglect the financial sphere as a key battleground in the modern era.
UBS was and is tightly woven into the social and ecomomic fabric of Switzerland that you could call UBS to be part of the shadow government of Switzerland.
Yeah corporatism worked out so well for the Italians under Mussolini that they captured him twice but the Nazi’s couldn’t spring him the second time around and the people beat him to death as he tried to flee the country. Our version is no different. The cause is the same and so will be the effect.
Too late.
Obama had his chance – he showed his true colors.
Anyhow, if any “real” Teddy Roosevelt type is gonna break up the big boys, its not happening until 2012.
That being said, if the Banks get in trouble again in the next 2 years, I doubt the public can stomach Bailouts – The Sequel. But we shall see.
Anyhow – true story here:
A Citigroup trader I know just bulldozed a 1 million dollar home in a scenic north Chicago suburb – to put up a 4 million dollar monstrosity with hot money from the “great 2009 year they had”. I thought the metaphor was so rich and thorough
the taxpayers own money is being used to literally bulldoze an old home in America
Full stop.
Think about that for a second.
I just had to pass it on. I mean think about it. The bailout money, actually paid bonuses- that physically destroyed a house. That metaphor cannot be comprehended without dope.
We would mock the Russians as anti-free market communist hacks if this happened on their shores. And yet it is in full force here in America. I am embarrassed.
Even with inroads into the mass media such as Taibbi, Bill, and Simon Johnson we seem to be playing the fringe. I don’t think most of America wants to wake up to how widespread the fraud and self-delusion is.
The losses will be papered over. A new US dollar will have to be issued (2016?). Concessions will be made to creditors. Wealth will be transferred from the developed world to the developing world as necessary. And life will go on. Most people will pay almost any price for the illusion of security. And so we have the era of the nanny state aka social welfare. First deflation, then inflation. When it’s rational to hoard precious metals you know that the system has gone off the rails.
“I don’t think most of America wants to wake up to how widespread the fraud and self-delusion is.”
From my conversations, experiences and observations I would contend that a vast majority of the population, of this country and most others, are so inured in their own private world of make-believe as to be utterly unaware of any need, let alone a “want,” to “wake up.” How else can one reconcile the ratings of the Faux Noise talking-bottoms? How else can one account for the popularity of the word-salad machine, Sarah Palin? How did a pseudo-cowboy facsimile of Alfred E. Neuman get “elected” to a 2nd term in ’04? Cognitive dissonance doesn’t even begin to scratch the surface of the delusion affecting far too many people.
This is such a tragic truth!
For years I’ve been telling members of my family that this economic ‘dream’ was a fantasy… that they were living in a bubble that would leave their children with a much reduced future.
The response: “Oh please… stop raining on the parade. If that’s what you believe, that’s fine. But just keep it to yourself and let us enjoy our bubble.”
(This is literally true… and does not bode well for prospects of ever having good government.)
“Obama had his chance – he showed his true colors.”
Speaking as someone who voted for him in 2008, and will probably vote for him in 2012 as the lesser of evils, it’s not really surprising. His ADA scorecard rating showed he wasn’t very liberal (not that all liberals are good on banking issues, cf Dodd and Frank). More importantly, he got more dollars from the finance sector than any other presidential candidate in 2012.
We keep hearing that the top banks all have huge trading profits. If most of the derivatives trades are done between the 5 largest banks and derivatives trading is a zero-sum game, then who is losing? If nothing else, it sounds like either
a) insider trading
b) manipulating the markets
c) collusion
d) monopoly
However they are making their huge trading profits, it should be against the law. It probably is, but nobody is enforcing it.
Policy-makers should also consider the merits of “limited-purpose” banking as part of the solution. More at:
http://wjmc.blogspot.com/2009/05/limited-purpose-banking.html
Thanks for the opportunity to comment…
I’ve said this before (about a million times): in today’s world money is INFINITE. The only question is who gets how much? That is now a political question. The ‘profits’ of the banks are a complete fantasy, they depend upon the repeal of mark to market accounting, the new collateral policy at the FED (WE TAKE DREK AT PAR!) and Fed interest payments on excess reserves.
At the other end of the influence spectrum, private savers of limited means have been absolutely denuded. Short term treasuries pay nothing, which means that if a saver wants ANY income he must choose between gambling in long term treasuries, corporate bonds or stocks. Each of these is developing its own bubble.
The only remedy for all this is political revolution. If you support either Democrats or Republicans you are just an enabler. There is not one single contemporary politician of importance willing to confront the FIRE sector.
Reducing the size of the biggest banks would still leave the problems of monopolizing corporations paying virtually no taxes, billionaires paying virtually no taxes, an oil dependent economy based on permanent warfare and defense boondoggling, a bloated government of useless paper shufflers manipulated by big money to extract endless rents, a real economy dependant upon squeezing wages, retailing of Chinese drek made with coolie labor, exploitation of illegal immigrants.
We now have an Executive committed to pretense and disinformation, a national legislature devoted to corruption and personal aggrandizement, a mainstream media devoted to collaboration, an academy devoted to toadying. As Keynes told us, it is hardly reasonable to expect a man to tell the truth when his salary depends upon hiding it.
Continuous money creation through slight of hand and accounting tricks is the only possible way to keep going what amounts to a game of musical chairs. All talks of reform are simply lipstick on the pig.
The only sensible question to ask is how can an individual protect himself and his family? I don’t think the answer is buying gold, but of course it could be.
“The only sensible question to ask is how can an individual protect himself and his family?”
Maybe that’s the point. Maybe the point is to prevent the proletariat from protecting themselves from economic predators. There are many examples of how individual recourse against corporate abuse have been legally limited by those very same corporate abusers.
The usual establishment response to such abuse is to blame the victim.
Timmy and Ben take the economy for a ride.
http://www.youtube.com/watch?v=_L8DcjFOD1k
Skippy…whats the difference….really.
Interestingly, if not tellingly, Paul Krugman has argued AGAINST breaking up the big banks. Worse, he seems to have done so without reference to the well-established observation that excessive domination of a given market by the major players can be expected to lead to monopolistic behavior and monopolistic abuses.
I can only take this to mean that Krugman’s position favors oligopolism in the US banking system.
Any insights on this circumstance would be appreciated.
I truly don’t know — visits to the WH? Do such things tend affect intellectual evaluation of facts at hand?
If Obama is doing it it has to be good?
Damned if I know.