Now straight from Senator Dick Durbin (D-IL):
"Frankly, banks own the place."
And from Collin Peterson, Chairman of the Agriculture Committee:
“The banks run the place. I will tell you what the problem is — they give three times more money than the next biggest group. It’s huge the amount of money they put into politics.”If its not enough to hear it straight from the horses mouth, this morning on The Big Picture, I came across some truely great linkage (Seriously, read this and follow a few links!) that more obviously makes the case.
I would just like to highlight something:
This is not freedom. This is not laissez faire. This is not capitalism. This is people buying government interference on their behalf to protect them from competition and their own failures. If we want to keep our freedom, bailout can not be tolerated.
A few of my favorite bits:
Also here is a excel file with that shows how much TARP recipients gave to congress, with a calculation of their absurd return on investment.
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Interesting ! Rank the excel file by their grand total contributions (campaign + lobbying) and guess who leads ?? Surprise surprise - General Motors (followed by BoA and Citi) !!
ReplyDeleteThe finance sector is simply too big. Not only do they have too much lobbying clout, but they have made themselves indispensable. The largest financial firms are too big to fail and are all but guaranteed to be bailed out next time too. The only solution is to break up the trusts like Standard Oil. There is building intellectual consensus for this from within mainstream macroeconomists; even Alan Greenspan has jumped on the bandwagon.
ReplyDeleteWow, this is fascinating! I really need to look up lobbying and campaign contribution rules..
ReplyDeleteI think that the "to big to fail" mantra is propaganda. I suspect that any of these behemoths could rather easily fail with minimal disruption and your average person wouldn't even notice.
ReplyDeleteFor example Lehman failed and the only disruption was from the surprise that it was allowed. After the initial shock Liquidation has gone rather smoothly. Even those big scary derivatives contracts settled without a ruffled feather.
Also Enron went under spectacularly and they were the 7th largest corporation in the United States. Other than the media interest, no one noticed. It didn't really even ripply the economy.
What these "to big to Fail" companies want everyone to forget is that when a company goes bankrupt nothing disappears. Assets are sold off the highest bidder, meaning to the person that thinks they can use them most efficiently. Bankruptcy is how assets that are being used badly are put in to the hands of people who can use them well. Its a wonderfully healthy process for the economy, and putting it off only slows everyone down. The bigger the company the more good assets are being tied up in unproductive lines of business, so I say the bigger you are the sooner you should fail!
This would also have the natural effect of breaking the companies up, since no one would buy them whole.
Trisco, you assert that Lehman failed without much to-do. What criteria are you using to make this judgement? The fact that there were not mobs on the street burning down half the country? The only reason the entire banking system did not collapse along with Lehman is because the government bailed out the rest of the banks. That is, the first domino fell, but the government stopped it from knocking down all of the rest.
ReplyDeleteEnron's derivatives operations where limited to energy and utility hedging. Enron was not as interconnected as Goldman Sachs is or Lehman Brothers was. "Too big to fail" does not simply refer to the size of a company, but to the size and interconnectedness of financial companies. As another example, Walmart is not too big to fail even though it is the second largest US company.
However, getting back to the original post: the banks "own the place" because of their large influence. The government would be much less vulnerable to regulatory capture if there were smaller banks. Why do you place 100% of the blame on the weak-willed government, but let the banks off the hook?
Hi Dependable,
ReplyDeleteLet me take these points in reverse order, because I’m confused by the last bit:
Why do you place 100% of the blame on the weak-willed government, but let the banks off the hook?”
Ok, I sat starring at the screen for quite a while trying to decide how to start, because this is decidedly not what I was trying to convey. I’m afraid my comment must have been a bit muddled, so in what follows I’ll be more expansive. And because of a 4096 character limit in the comments, I’ve broken the reply into 2 parts.
Far from wanting to shield the banks, my point was that the best thing for everyone involved would be to let the banks suffer the consequences of their actions. A break up of the banks would likely not result in a bond holder haircut. Given other bailouts that have occurred recently it likely won’t even wipe out the equity. If you ask me, this is letting banks off the hook. Worse still, a breakup would keep this relatively large portion of the total economies resources in the hands of those who have proven they can not use it efficiently. What is beautiful about bankruptcy is all those resources would go to people who are sure (and are willing to pay to prove it) that they can put those resources to use in a profitable manner. The only people hurt by a bankruptcy are the people who deserve it, those who took a stake in a bad business. The rest of us are drastically better off as resources are put to good use. One might say lets break the banks up and wipe out all the stake holders. I don’t think this is fair either. The stake holders should get what the company is worth, no more, and this is what bankruptcy does.
the banks "own the place" because of their large influence. The government would be much less vulnerable to regulatory capture if there were smaller banks.
I think the banks own the place because of the 1913 Federal Reserve Act, which gave them control of the creation of our money supply. I also think the way to make the government impervious to bribery, is to remove the incentive. If the politicians couldn’t hand out favors worth Billions of dollars, no one would give them money. Also, notice that there are plenty of larger companies that can spend as much or more than the banks on politicians. The closest is GM and they were rewarded accordingly. Should we have some arbitrary line at which we break up companies? Should it be based on market capitalization? Total assets? Income? Sounds like a can-o-worms to me. Also, recall that it’s the government officials that are being bought. To ask them to determine when a company is “too big” is asking the fox to guard the hen house. What is their incentive to stop all that cash from flowing their way? Also how long before the breakup decision itself is bought and paid for? What if yahoo and Microsoft could bribe politicians to do away with Google?
To be sure a breakup of large insolvent banks and removal of government subsidies would be better than continued support of failed companies at the expense of their smaller healthier competition, but bankruptcy would be far better.
Hi Dependable(cont.),
ReplyDeleteEnron's derivatives operations where limited to energy and utility hedging. Enron was not as interconnected as Goldman Sachs is or Lehman Brothers was. "Too big to fail" does not simply refer to the size of a company, but to the size and interconnectedness of financial companies. As another example, Walmart is not too big to fail even though it is the second largest US company.
I’m afraid you have a definition of TBTF that simply doesn't exist in the actual government. By your definition billions would not have been given to select auto companies and billions more to GMAC, the financing subsidiary of GM. Even here the politics of the hand out was evident, as GM received support weeks before Chrysler giving them a big advantage on the car lot. I don't think its a coincidence that GM gave more money then Chrysler.
“The only reason the entire banking system did not collapse along with Lehman is because the government bailed out the rest of the banks. That is, the first domino fell, but the government stopped it from knocking down all of the rest.”
Allow me to turn your question on you: By what criteria does one make this assertion? I can’t think any that is evidence based. Of course this is what the TBTFs and those that are handing them hundreds of billions of dollars in return for millions would like us to believe. Any hostage taker would like you to believe that the consequences of ignoring their threat would be horrible. The question is, is it true?
Trisco, you assert that Lehman failed without much to-do. What criteria are you using to make this judgement? The fact that there were not mobs on the street burning down half the country?
I make this assertion base primarily on an understanding of what bankruptcy is. Bankruptcy does not destroy or remove anything. Its simple a change of hands and a redistribution of recourses to people who can do better with them. If you’re not a stake holder, being upset about a companies bankruptcy is like being upset when a caterpillar enter the cocoon. What enters is slow, inefficient, and even a little ugly. What come out is able to fly on its own. It’s a net positive to society. So I wouldn’t expect it to hurt society weather it happened to one company, or to the top ten largest banks in the world. Those resources will be bought up and used by the greater then 3000 other banks that didn't take the same risks and leverage themselves to the hilt and I doubt I’d notice anything but a change in the name on my ATM. And indeed, in the Lehman bankruptcy that seems to be what has happened. If you we’re not a stake holder, you didn’t even notice.
Let's start with where we agree: First of all, bankruptcy is great. We both appreciate how it redistributes assets. I like your caterpillar analogy. Secondly, GM and Chrysler should not have been bailed out. Thirdly, the bailout of GMAC has more to do with propping up auto sales than it being a financial company that's TBTF.
ReplyDeleteNow let me try to clarify what I meant to say. Given that the banks have already been bailed out, I propose we break them up before the next crisis. That way, when the next crisis hits, they can go bankrupt and have their assets divvied up among their creditors.f
What I was trying to say, is that as long as the banks continue to exist in their current form, bailouts are inevitable for two reasons. First, they exert too much (political) influence on the government. Second, the economic effects of a major failure would be too great. Let me elaborate on each.
With respect to their political influence, you are completely correct that it would be the government (which we all recognize as being vulnerable to lobbying in various forms) who would make the decisions about breakups. However, breaking up the banks would be a one time decision. A motivated public could keep the spotlight on decision makers until the banks are broken up and shrunk down to size. After that, the bad effects of their usual, venal behavior will be limited. The banks' new, shrunken size will reduce their clout, and the usual day-to-day regulatory decisions will be less significant.
Maybe you're thinking: Ahh, but during the bailout there was immense public scrutiny and outrage. How come that didn't stop the bailouts? The answer is the second reason for the inevitability of bailouts: the financial system is so interconnected. When a large bank goes bust, so many other financial players are owed money by it that they feel the distress too. Also, there is no compensating benefit felt by those who owe money to the newly defunct bank. Rather, everyone's uncertainty increases.
ReplyDeleteAlthough in a bankruptcy no actual assets are destroyed, there are plenty of paper losses. The uncertainty inherent in a bankruptcy further depresses the paper wealth of the remaining players. This will push marginal companies and banks into insolvency. Even if their paper losses would eventually recover, insolvency is insolvency and creditors have a tendency to seize collateral and take legal action. Banks which were deemed healthy before get pushed into marginal status, and thence into insolvency.
The difference between banks and non-finacial companies is that: (a) banks are inherently highly leveraged, and (b) banks don't have real assets and real earning power, they only have their paper assets.
Lehman Brothers was large and its assets were widely held. When so many financial actors suddenly took a hit from the bankruptcy, they all panicked in a way that did not follow IndyMac's bankruptcy in July 2008. The credit markets completely dried up. The interbank lending rate shot up, although most of the time banks simply would not lend to each other in Sept and Oct 2008. Many companies faced acute distress from their sudden inability to borrow. A run on the money market funds was only stemmed by government guarantees. Traditional bank runs were averted only by massive, additional government guarantees. That is the basis for my assertion that Lehman's collapse was by no means orderly. However, myriad small banks go bankrupt without anywhere near this much trouble.
If we break up the large banks now, then we can let them go bust normally in the future.
Post Script: The banks controlled the money supply even before the creation of the Federal Reserve system. They took deposits and lent out money, just like now. The only difference is that now there is a lender of last resort to smooth out liquidity (but not insolvency) crises. If we were to abolish the central bank, would you also do away with prudential regulation? Would you leave it to banks to regulate themselves and print as money as they can (temporarily) get away with? Because that's the pre-1913 system.
ReplyDeleteTrisco: I think we're both happy that CIT was allowed to go bankrupt without any more government bailouts. CIT is a tenth the size of Lehman Brothers. There is none of the contagion that hit when Lehman Brothers collapsed. When all banks are smaller (and correspondingly less complex), then bailouts are unnecessary.
ReplyDeleteHi Dependable,
ReplyDeleteI think you’re right that there is more we agree on then disagree. And if the only choice is continue on the bailout band wagon, or break up the banks, I suppose I would support break up. I just think there is a better way.
I am very happy they let CIT Group go under (but I was happier when I misread the headline as CITI Group). I think the smooth prepackaged bankruptcy could be employed with other banks as well, with minimal disruption.
It funny, I was planning on using this as an example of why we can and should let them all fall. We as a country gave CIT 2.3 Billion dollars. We were told that if we did not, the entire financial system would come crashing down. Now they fail without a peep. 115 or so other banks have failed this year. You have to admit its tempting to apply induction.
Lets consider the two options:
Break up and Bankruptcy
1) Lets say its true, that if the banks were smaller, bailouts wouldn’t happen.
2) The mega banks are insolvent even now. Even with the bailout. They’ve just been allowed to stop marking assets to market.
3) We break them up into smaller pieces.
4) The pieces, at least some of them, are still insolvent.
5) The insolvent pieces go through bankruptcy. And the good pieces survive.
Or
Bankruptcy and Breakup
1) The mega banks are insolvent even now. Even with the bailout. They’ve just been allowed to stop marking assets to market.
2) The mega banks go through bankruptcy and the good pieces survive.
If you have a rotten apple, and you cut it up, it’s still rotten. Only now it’s more work to remove the rotten bits from the good bits. The second method has the advantage of not giving the government a completely new, likely to be broadly construed power.
Nothing a government does is a one time thing. It is a precedent. It will be repeated, most likely out of context. I feel I can safely guarantee, that if we break up the large banks, that power will be broadly construed and used again.
Now Lets say it’s not true that the mega banks are still insolvent if we let them keep what we’ve given them, but remove continued support. Then I guess I’d like to see them broken up. Better part of the curative medicine then none.
Still what I think is lost in the national conversation is that we as a country have chosen repeatedly to violate the free market and keep a large portion of our capital in the hands to people who lost it fair and square; people who have repeatedly shown themselves to be incompetent. It’s a vast drain on our productivity and probably more detrimental than the debt we’ve incurred to do it.