The Good And Bad Of Banks Too Big To Fail Getting Bigger...
from the not-all-bad,-but... dept
Ever since the whole financial crisis began, and the concept of "too big to fail" became a common phrase, I've been wondering why the US gov't didn't set up a simple provision in any bailout procedure: if you are too big to fail, and because of that need a gov't bailout, then a part of that bailout means you need to become small enough to fail. I think it's a perfectly reasonable suggestion that has been pretty much totally ignored.So, when news came out that the biggest banks, the ones deemed "too big to fail," are now getting even bigger, you might think that I'd view that as a bad sign. And... partly, I do. But not for the reasons you might expect. The issue of "too big to fail" isn't the bottom line size of the bank, it was about how interconnected it was in the rest of the economy, and how any ripple effects of a failure would damage (significantly) other parts of the economy. But, since the government has done pretty much next to nothing to actually deal with that sort of systematic risk (and, no, putting in place a "systematic risk" manager, as we keep hearing, isn't going to fix the problem), it should come as no surprise that these banks still have such risks.
But, the fact that, by themselves, these banks are growing isn't a bad sign. Given what the government has done, it's actually a good sign. You should be a lot more upset if, after the government gave these banks so much money, they went out and lost it all. Instead, many of them have at least put it to good use (and some have returned money to the government at decent interest rates -- though, the amount returned still is a blip compared to the amount at risk).
The real issue isn't the size of the banks, but how interconnected they are. But little to nothing has been done to take on that problem -- which is a bad thing. However, given that, it's at least a decent sign that these banks we've given so much money to are actually doing better these days.
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Filed Under: banks, radical transparency, risk, systematic risk, too big to fail, transparency
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Agree with #1
http://www.foxbusiness.com/story/markets/industries/government/report-crisis-loans-net--bi llion-fed/
Time to audit this sucker.
http://www.businessinsider.com/ron-paul-says-barney-franks-backs-the-fed-audit-bill-2009-8
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Re: Agree with #1
Isn't that a good thing? The "fed" is taxpayers. But, I'm sure the overall losses will drop that number significantly before this is all done...
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Re: Re: Agree with #1
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Re: Re: Agree with #1
Yes and no – from my understanding it's sort of a weird barely accountable mixture of public and private; as far as I'm aware it supposedly has public accountability at an overall level, but at a functional level consists of a select group of privately owned banks
The federal reserve is only slightly more federal than Fed-Ex
So no - the fed making more money does not have to amount to the public seeing any of it; they will undoubtedly see some, but since this supposedly publicly accountable bank doesn't appear to have effective auditing already in place (there has to be a lobbyist backed, brown envelope reason for why such an obvious step has not been taken decades ago), I’d guess that the percentage of the profits not eaten by internal 'costs' may be a lot less than you might think
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Re: Re: Agree with #1
....what? Care to explain this? The FED is a tight group of private banks that have been given the power over monetary policy in this country. How is the FED taxpayers (other than the private citizens that own the private banks making it up)?
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Bank Holiday, FDIC Report, and the Federal Reserve Secrets
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Disagreeing
That the bailout simply seemed to feed into usual practices of consolidation, etc., and didn't bring on any interesting regulatory changes seems to me to confirm it.
In other words, the horse has left the barn on this one. It'll be fascinating to see the circumstances the next time this rolls around. I'll put my money on "The veep is also VP at BoA"
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Re: Disagreeing
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This is HORRIBLE for Taxpayer and Consumer
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Hey, wait a minute
The problem was the asymmetry created when huge banks knew that they could take significant risk, and if it turned out well they'd see huge profits (and, not incidentally, management bonuses), but that they were essentially insured on the downside by the government.
The only reason the free market works is that people play with their own money. The too-big-to-fail phenomenon is like sending me to Vegas with the deal that if I win, I split the money with you, and if I lose, you cover my loses. From my point of view, I'd be crazy not to maximize risk in that scenario.
So yes, it's good that the banks are recovering. It is not good that the fundamental TBTF problem has not been addressed. Any bank (or other company) that's going to be failed out of trouble should also be regulated to limit the risks it takes. Otherwise the asymmetry will continue.
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Re: Hey, wait a minute
In light of the bailouts it makes perfect sense that bankers will start to take huge risks with the assumption of a Government safety-net, but in reality the precise opposite of this is true.
In the current climate people are worried that a recovery will be delayed due to the risk-adverse culture that has been created in the business world as a result of the meltdown.
But back to the central issue...the immediate problem is one of restoring growth and stability to the economies of the world. For that I don't think too many Governments are going to regulate very heavily in the short-term, but rather focus on what can be done in the long term.
The danger is that a lot of people in the financial industries are desperate to return to how things were, and will fight desperately to resist the needed reforms that might increase regulation to prevent systematic problems.
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Re: Re: Hey, wait a minute
For that I don't think too many Governments are going to regulate very heavily in the short-term, but rather focus on what can be done in the long term.
Are you fricking joking? Government is the most short-sighted, self-serving, vulnerable-to-gaming entity there is. More regulation just leads to more inefficiency, more inability to change and adapt, and regulatory capture that skews the rules in favor of incumbents over the innovators and entrepreneurs that represent the next wave of progress.
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Re: Hey, wait a minute
I don't think he missed the point I think he was trying to make his own point regarding too big to fail and how that pertains to antitrust laws.
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Re: Re: Hey, wait a minute
I think these original laws need to be reinforced and/or enforced to prevent future crises
The increased consolidation that has resulted from bailouts and other government meddling may have strengthened the economy in the short term, but it puts the economy at greater risk in the long term. I think Robert Reich said it best when he said something like "If an entity is 'too big to fail,' it's just too big!" (Hope I am not misquoting.)
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It's shocking how accurate some of the accusations about large corporations rallying for world dominance really are.
Think about it - the big have gotten bigger and the small have been eliminated from the race. I'm not a fan of any market where that amount of control is in the hands of those who probably intentionally stuffed it up in the first place.
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And people are not rational. If you study economics beyond econ 101, you will realize that. Behavioral econ has shown it time and time again...
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Not good enough, because the ownership of the large corporations, which would continue to own the smaller portions, is ultimately international banks in the form of direct partial ownership, debt owed, board member positions, etc.
If you don't regulate bank involvement in business, you'll get nothing changed.
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Equally problamatic, since they currently have massive amounts of influence and power because of the sheer amounts of capital in their coffers, not to mention the money that is owed them. Taking action against them, in the cases of many nations, would be seen as being similar to King Philip IV outlawing the Knights Templar when they wouldn't forgive him his debts.
Incidentally, that analogy makes a great deal of sense for a variety of reasons. The Templars pretty much invented the modern banking system, with regard to loans and interest. Some people also believe that Templar treasures, possibly including the legendary Treasure of Solomon, were recovered by one WWII beligerent party or another, making it's way back to the European Rothschilds and their American agents, the Morgans and Rockefellers, and was used to finance the banking explosion and expansion that has ocurred since.
Either way, what we need is a kind of French Revolution on a global scale, meaning the simultaneous rejection of current banking policies and practices throughout the world. There hasn't been leadership in the States that hasn't been in the banking industry's back pocket since maybe Eisenhower, who in his farewell address to the nation stated:
"In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals so that security and liberty may prosper together."
Alert and knowledgeable people today are referred to as alarmists or conspiracy theorists, even when discussing items in the public record like The Echelon Network, NSA wiretapping, or MKULTRA and COINTELPRO.
My opinion? In America, they've won the first round, and it's going to get better before it gets worse.
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http://www.zerohedge.com/article/racketeering-101-bailed-out-banks-threaten-systemic-collap se-if-fed-discloses-information
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