1
Dec
I read Seeking Alpha’s “Bigwigs Debate Too Big to Fail“. It discusses the opinion of several key financial players of the US economy regarding whether institutions can be “too big to fail”, and if so, what to do about them. Very excellent read. The players fall into two categories:
Bust ‘em up:
- Alan Greenspan
- Simon Johnson
- Paul Volcker
- William K. Black
Let ‘em fail ( with strings attached ):
- Ben Bernanke
- Sheila Blair
- Tim Geithner
- Paul Krugman
- Jamie Dimon
Some quick hits from me:
- It was Greenspan urging Congress to repeal the Glass-Steagall Act in 1999 that created this particular mess. Banks were regulated tightly before then. So, ten years later, Greenspan supports busting up his babies. A lot of people, including myself, never liked Greenspan, this is a good reason why.
- Giethner still supports less regulation of “too big to fail” companies. But, he supports letting them fail. This is totally contradictory to the actions he took throughout 2009.
- Sheila Blair supports letting big banks fail. As chairman of the FDIC, she’s led the FDIC into bankruptcy. Is the FDIC “too big to fail”? In the process of propping up the FDIC, Blair has put a huge part of the burden on small local banks that do not have the reserves to support such pressure.
- Paul Krugman, who I disagree with everything he’s ever said, “The point is that finance is deeply interconnected, so that even a moderately large player can take down the system if it implodes. Remember, it was Lehman — not Citibank or B of A — that brought the world to the brink. So I think of the pursuit of a world in which everyone is small enough to fail as the pursuit of a golden age that never was. Regulate and supervise, then rescue if necessary; there’s no way to make this automatic.” Right point, wrong conclusion. If nothing is too big, or too small, to affect the financial situation, then may as well let them all eat cake. Almost every other person in this article disagrees. I do as well. Krugman feels that for some bizarre reason, politicians and government employees know what’s better for the banking industry than the people who have dedicated their lives to the banking industry. Having worked with government regulations for 20 years, I know that’s 100% wrong. So, as usual, I think Krugman’s full of it.
What this is all leading to is there is a sentiment brewing against big banks ( yeah, I know, it’s been brewing since the days of Jesus. ) Now, it’s manifesting itself once again through Bernie Sanders:
He, along with Maurice Hinchey in the House:
Now, although their intentions are good, their logic is totally wrong. First of all, big businesses need big banks. Just because those big banks don’t exist in the United States doesn’t mean the need will go away. That money and risk will just go somewhere else.
Secondly, Fannie Mae and Freddie Mac are basically banks managed by the federal government basically as these two are proposing. They are bankrupt. However, it’s too big to fail. So, I’m guessing that once all these strings are attached, we’ll wind up with nothing more than five or six Fannie Maes or Freddie Macs. It was not the failure of Lehman or Bank of America that set this whole thing in motion, as most of these players lead you to believe, it was the collapse of the federally regulated institutions that put the credit squeeze on the others causing the liquidity crisis that caused the collapse of institutions that relied on the free flow of credit from Fannie Mae and Freddie Mac. Freddie Mac and Fannie Mae are, of course, too big to fail. They are not, of course, targets of Bernie Sanders and Maurice Hinchey. Until they address the underlying problems, they’ll never fix the big picture. If it’s too big to fail, and too big to exist, and it needs to be gone, that applies to the flawed federal companies as well. If they don’t, the situation will only get worse.
Lastly, if this legislation passes as is, and the Community Reinvestment Act is left as is, then large banks will be required to take risky loans by law and will be limited in the amount of safe loans they can solicit. Anyone want to ponder what that means?
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FJ on 12.03.2009
We have another similarity in “always disagreeing” with Krugman. I don’t know why he thought “Lehman brought the world to the brink”.
Read this brilliant article, profiling our ex-boss from BarCap (not sure if you are following, as of yesterday, we are now BlackRock!), and one can reasonably conclude that “Lehman did NOT bring the world to the brink”:
http://www.esquire.com/print-this/barclays-deal-of-the-century-1009-2
I think my 2nd man-crush, Jamie Dimon puts it best:
http://www.forbes.com/forbes/2009/1130/power-09-worlds-powerful-people-jpmorgan-chase-master-banker.html
“I think America is an incredibly entrepreneurial, innovative, strong, vibrant, go-getter country,” he says. “But I fear in the spirit of doing good we could create a weed of bureaucracy that could wind around our ankles and necks.” Dimon says he hoped the crisis would create an opportunity “to streamline, strengthen and simplify our spaghetti regulatory system.” Instead, he says, “we are making it more complicated and more litigious, which, over time, I think will be more damaging to our country.”
Our governments (local and federal collectively) can’t even operate an efficient public transportation system like the London’s tube ….. how can they do anything good with banks or healthcare?
Moonage on 12.07.2009
It takes some getting used to for me to get past the “Esquire” label. Never took them as a financial source. Once I did, it’s an excellent article. I’m not sure how many people actually recgognized the fact Krugman seems clueless as to what happened. But the fact he’s got the ear of the President disturbs me.
I can see a man-crush with Jamie Dimon. Not sure I agree with his end-game, but the very simple fact he seems very aware of what is going on and why, impresses me.
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