Break up "too big to fail" banks: good idea or not?

[Craig234]

Yep, the pos Phil gramm who also had a hand with the Enron fiasco.

http://www.nytimes.com/2008/11/17/business/17grammside.html?pagewanted=all&_r=0

Thank you, I had meant to point out in my post that Gramm's bill was credited as the cause of allowing Enron to happen, and forgot.

 

[Sonikku]

I think the core problem is that going after those that use and abuse the system is practically impossible. Even if there needs to be a change, those in said positions of power sensing the potential end to their personal gravy train will cause so much fallout, kicking and screaming for everyone and everything beneath them on the food chain to the point of ensuring the very idea of moving against them is unthinkable.

 

[Craig234]

In other words, the Fed gov has become such a large beast, we need to follow your logic and break up the too big to fail entity.

Ideology is the enemy Craig, ideology is the enemy...

Chuck

The ideology here is yours, anti-government ideology. The issue isn't size alone, and the size of our democracy and the people's power to stand up to special interests who challenge the people's interests is not the same issue as the power of those special intersts who prefer they run the country.

Your argument is like saying 'if we should reduce street gangs, we should reduce police too'.

 

[Craig234]

I think the core problem is that going after those that use and abuse the system is practically impossible. Even if there needs to be a change, those in said positions of power sensing the potential end to their personal gravy train will cause so much fallout, kicking and screaming for everyone and everything beneath them on the food chain to the point of ensuring the very idea of moving against them is unthinkable.

Here's the thing.

Their end game is to build up such a sense of futility in the ability of government to help the people, insrease people's cynicism, to a point that people just don't really care about democracy and their government and become vulnerable to offers of benefits if they'll agree to hand over that power, to emasculate government.

That's the real danger.

So as hard as it is, we need people to prefer democracy to not having democracy.

That's where the 'anti-government' fanaticism is a problem, so many people encouraged to just hate government, encouraged by these powerful interests, the tea party mentality.

It's related to the same agenda with 'starve the beast', getting people to think of nothing else than 'how to cut government'.

The bottom line is whether people view the private powerful interests as more of a threat, or their own elected government as more of a threat.

These interests fuel the flames of government hatred precisely because it keeps the people busy hating the government instead of hating their abuses.

Instead of some sort of populist uprising that led to support for workers and regulation of finance in the 1930's, they get the people to just demand more government cutting.

Save234

 

[pauldun170]

Let me save you time. Banks lobbied for it. The campaign used was that the US needed to 'modernize', or it risked letting the world take over the banking industry.

In fact, the bill with a lot of the deregulation was the 'financial services modernization act'. There were horror stories told of European markets becoming the world leaders.

What good Congressman can stand by and let 'obsolete' banking regulations from the 1930's hold back our great US industry? Time to modernize.

Only a small number of members spoke out against the bill, including a Senator who was the grandson of the member who had led the fight for Glass-Steagal, Byron Dorgan.

You can read a Bill Moyers piece on his speech and watch the video here:

http://billmoyers.com/content/a-senators-prophetic-words-then-and-now/

But a taste of it:



Now, the person who led the fight FOR that deregulation bill was Senator Phil Gramm, who Paul Krugman called 'the king of deregulation' and named as one of the two people most responsible for the 2008 crash (behind Alan Greenspan, whose Ayn Rand ultra deregulation ideology led him to terrible policy).

Remember 'Credit Default Swaps', the Wall Street creation that was a totally unregulated mechanism that was nothing but a tool for Wall Street to evade regulations on insurance, by providing 'insurance' with massive leverage and profits, which played a key role in the industry having a massive mess of owing itself trillions of dollars it couldn't begin to repay?

Legislation to prevent the government from regulating CDS's was co-sponsored by Phil Gramm, the - wait for it - "Commodities Futures Modernization Act of 2000".

By 2002 Gramm left the Senate having worked hard for the banks... immediately becoming an employee of bank UBS, lobbying for them. He was McCain's 2008 economics advisor.

No offense, but I actually enjoy hitting the books for stuff like this so I'm ignoring (for now) everything you just posted.

 

[Craig234]

No offense, but I actually enjoy hitting the books for stuff like this so I'm ignoring (for now) everything you just posted.

Well, that's disappointing - I encourage you to do your own research, but that's not exclusive to reading what I posted for you.

 

[pauldun170]

Well, that's disappointing - I encourage you to do your own research, but that's not exclusive to reading what I posted for you.

I did say "for now"
I did read your post...
dont take offense

 

[Craig234]

I did say "for now"
I did read your post...
dont take offense

Good to hear. I look forward to you adding your own comments in response after research.

 

[pauldun170]

Good to hear. I look forward to you adding your own comments in response after research.

Its an interesting topic
Reading has brought up some funny tidbits, like the origin\creator of the CDS.

 

[chucky2]

The ideology here is yours, anti-government ideology. The issue isn't size alone, and the size of our democracy and the people's power to stand up to special interests who challenge the people's interests is not the same issue as the power of those special intersts who prefer they run the country.

Your argument is like saying 'if we should reduce street gangs, we should reduce police too'.

When the police collectively are worse than the collective street gangs, then Yes, that's exactly what we'd do.

Let me guess: The insanely expensive and powerful Fed isn't too big, needs to actually be larger and more powerful, amirite?

 

[Craig234]

When the police collectively are worse than the collective street gangs, then Yes, that's exactly what we'd do.

And when the police are not worse but you call for it anyway, you're a right-winger.

Let me guess: The insanely expensive and powerful Fed isn't too big, needs to actually be larger and more powerful, amirite?

No.

 

[Craig234]

Its an interesting topic
Reading has brought up some funny tidbits, like the origin\creator of the CDS.

Yes, the woman who led the group who originally created the CDS saw how horribly they got abused and ended up stopping using them.

Let me know if you have questions I might be able to help with or want any recommended books.

 

[LegendKiller]

I do not think that i-banks should be split from commercial banks. However, I do think they need to be limited to ~5% of all deposits in the US.

 

[chucky2]

And when the police are not worse but you call for it anyway, you're a right-winger.

Right now at least 25% of my money is going to Fed (really it's more), let me know when the local gangs hit that amount.

No.

I simply don't believe your response here.

Chuck

 

[Craig234]

Right now at least 25% of my money is going to Fed (really it's more), let me know when the local gangs hit that amount.

There's no talking to you if you are that irrational to compare them.

I simply don't believe your response here.

Chuck

Of course you don't. That only says something about you, not me.

 

[Charles Kozierok]

chucky2 and Craig234 -- please stick to the topic and drop the personal squabbling and speculation about what the other person believes. Thanks.

 

[Bowfinger]

I do not think that i-banks should be split from commercial banks. However, I do think they need to be limited to ~5% of all deposits in the US.

Iowa used to have a law like that, limiting a banking chain's deposits to no more than 10% (IIRC) of total deposits in the state. Notably, it only limited growth by acquisition. A bank was free to grow larger than that if it offered such great service and pricing that customers flocked to it. It seemed to work well, at least for Iowa consumers, and we had a lot of good competition among banks.

Then Norwest (now Wells Fargo) decided it should be able to grow more than that in spite of its shoddy services and uncompetitive costs. It launched a full-scale lobbying assault to get that law changed. It took several years, but their success was inevitable. No legislature has the integrity to resist wholesale bribery by such deep pockets. Norwest gobbled up many of its competitors and Iowans now pay far more for much poorer service.

Iowa also used to have a usury law limiting consumer interest rates to 18% on the first $500 and 15% above that. Obviously unacceptable to greedy banks, so that law is now ancient history. Iowa also had a law requiring all ATMs in the state (except those on bank premises) to work seamlessly together regardless of the owning bank, with no consumer fees for using an ATM on another bank's network. Once again, great for consumers, but not for greedy banks. If memory serves, it was Discover that sued to overturn that law.

 

[Fern]

The problem of banks that are "too big fail" is a serious problem, not just here but virtually world-wide.

However, I'm very pessimistic that a good, effective solution can be found.

Banking, as with many other things, has become terribly complex. I think there are simply too many interrelated facets in banking, and too many complex investment strategies/plays/products for all possible outcomes to be accurately predicted in the case some element gets 'sideways'.

I don't believe bankers themselves fully understand them sufficiently to predict those and develop effective safeguards (and IMO this has been proven).

And I have utterly zero confidence that career politicians in Washington are capable of solving this. Every time something like this blows up, they simply reach for bailouts. To me this demonstrates that they know that they don't know, and instead are willing to content themselves with bailouts.

E.g., the Dodd-Frank bill was created to prevent "too big to fail" banks but has had the exact opposite effect. So, I see little hope for good solution out of Washington or anywhere else.

Fern

 

[LegendKiller]

The problem of banks that are "too big fail" is a serious problem, not just here but virtually world-wide.

However, I'm very pessimistic that a good, effective solution can be found.

Banking, as with many other things, has become terribly complex. I think there are simply too many interrelated facets in banking, and too many complex investment strategies/plays/products for all possible outcomes to be accurately predicted in the case some element gets 'sideways'.

I don't believe bankers themselves fully understand them sufficiently to predict those and develop effective safeguards (and IMO this has been proven).

And I have utterly zero confidence that career politicians in Washington are capable of solving this. Every time something like this blows up, they simply reach for bailouts. To me this demonstrates that they know that they don't know, and instead are willing to content themselves with bailouts.

E.g., the Dodd-Frank bill was created to prevent "too big to fail" banks but has had the exact opposite effect. So, I see little hope for good solution out of Washington or anywhere else.

Fern

The issue is simply one of deposits and capital. The first issue is one of riskiness and liquidity. If you limit the damage that depositors can sustain it will ease the burden on the financial system as a whole. Increasing capital and reducing leverage will eliminate some of the arbitrage going on, purposefully targeting derivatives for capital target increases is a first step.

 

[werepossum]

The Republicans worked hard for years to dismantle Glass Steagall... They currently fillibuster their own bills and won't even willingly fund healthcare for 9/11 first responders... how do you expect to ever get it passed?

As Carig points out, the Democrats have been marching in lock step with them on this issue.

gotcha

Crap...now I have to read up on Banking act of 1933 and the damn revisions over time.

Its simple enough to say we "should break out" those pieces to comply with the spirit of the original law but I need to see what drove the changes to the law over the years that led up to it being chucked

Craig pretty much points it out. Banks have lobbied for decades to get rid of Glass-Steagall. Sometimes investment banking is hot and sometimes savings and loans are more profitable. Neither side wanted to be shut out of the other market. There's also a legitimate argument to be made for diversification; if a bank is in both savings and loans/home mortgages and in investment, a crash in either market won't bring them down. And as Craig points out, there have been repeated cries that this regulatory and artificial split limits the size of American banks and prevents them from having the ability to compete with banks who do not have that restriction and can invest in whichever market is most profitable at the moment. All these arguments have merit.

The other side of the argument, by contrast, is very simple. If very large banks are allowed to play on both sides of the fence, then a severe crash in one market will take down the other and thus, the whole economy. It took three decades to begin gutting Glass-Steagall, and another three and change to kill the last tattered remnants of it. (Graham-Leach-Bliley removed only the last vestiges of Glass-Steagall, not the whole Banking Act of 1933.) It took only half a decade after Graham-Leach-Bliley to get into serious trouble, and less than a whole decade until we had a severe crash. That seems to me to be pretty good evidence that the wisdom of Glass-Steagall still applies. You'll note however that neither party has made a serious effort to restore it; the Democrats use it as a fund-raising catch phrase, and the Republicans just ignore it.

 

[Craig234]

The stability we had in banking before letting the bankers deregulate.

Note: for society, the stability of lower-cost, stable banking is a good thing.

For the banking industry, this period of instability has seen them skyrocked profits.

Also note: pre-FDR, the US had crashes every 10-15 years IIRC. Always.

 

[werepossum]

The problem of banks that are "too big fail" is a serious problem, not just here but virtually world-wide.

However, I'm very pessimistic that a good, effective solution can be found.

Banking, as with many other things, has become terribly complex. I think there are simply too many interrelated facets in banking, and too many complex investment strategies/plays/products for all possible outcomes to be accurately predicted in the case some element gets 'sideways'.

I don't believe bankers themselves fully understand them sufficiently to predict those and develop effective safeguards (and IMO this has been proven).

And I have utterly zero confidence that career politicians in Washington are capable of solving this. Every time something like this blows up, they simply reach for bailouts. To me this demonstrates that they know that they don't know, and instead are willing to content themselves with bailouts.

E.g., the Dodd-Frank bill was created to prevent "too big to fail" banks but has had the exact opposite effect. So, I see little hope for good solution out of Washington or anywhere else.

Fern

I'd say the Dodd-Frank bill was crafted solely to provide political cover for Chris Dodd and Barney Frank, who led the fight to prevent any change in the GSEs until they and the economy crashed and burned. In that light, its failure to provide any measurable return on its cost becomes quite understandable, because its intended ROI had already been realized by its very existence.

The complexity of banking today is undeniable. In my opinion this is another argument for restoring the separation of Glass-Steagall. It's difficult enough mastering one side of the banking spectrum; now we're allowing one set of CXOs to oversee both sides, with an increasingly large part of our economy tied up to boot.