Don’t Touch the Banks!

Those who like banks that are too big to fail will love the latest financial reform proposal in the House. The bill put forward by House Finance Committee Chairman Barney Frank does little to change the current structure of the financial system.

The too big to fail (TBTF) banks will be left in place, even bigger and less able to fail than before. There will be nothing done to separate commercial and investment banking, so giants like Goldman Sachs will be free to speculate with money guaranteed by the Federal Deposit Insurance Corporation. The main difference is that the Federal Reserve Board will be granted even more power than it has now. And, we will tell the Fed to be smarter in the future, so that it doesn’t make the same stupid mistakes that gave us the current crisis.

While we all want a smarter Fed, it is not clear that the bill before Congress will get us one, even though it will definitely give us a more powerful Fed. The new Fed will be able to decide which financial firms need to be put through a bankruptcy-like resolution process, and will be allowed to pay for it with a virtually unlimited amount of taxpayer dollars.

While the bill proposes that the cost of cleaning up after a big bank failure is to be paid by other big banks, in fact the mechanism laid out in the bill virtually guarantees the opposite. Rather than raising a pool of money in advance from the big banks to cover the cost of a bailout, the bill proposes that large banks would be assessed a special fee only after a failure.

To see how strange this is, suppose Citigroup or some other major bank collapsed, requiring $100 billion to pay off creditors. (We actually should not need a penny to pay off anyone other than insured depositors, if we were serious about the banks not being TBTF.) Either the failed bank was acting as a rogue institution, engaged in behavior that was far more reckless than its peer institutions, or it was doing the same thing as everyone else.

In the first case, would it make sense to tax the other large banks $100 billion because Citigroup acted recklessly? If the recklessness of one bank had led to its collapse in an environment where its competitors are sound, this would imply that there had been some serious failures of regulation. Why would we tax other large banks because the Fed, the FDIC, and/or other regulatory bodies had failed in their job?

Alternatively, suppose Citigroup collapses because it was doing the same thing as other banks, but was just slightly more reckless or unlucky. In this situation, which is similar to the one we faced last fall, all of the banks will be severely stressed. It would be impossible to hit them with a special fee. Could we have slapped a special fee on Citigroup and Bank of America last fall to have them cover the cost of the failure of Lehman? At the time, imposing any significant fee would have almost certainly pushed several more banks to insolvency.

The bottom line is that this bill is almost certain to leave the taxpayers holding the bag for future bailouts. Even worse, it does nothing about the moral hazard created by having institutions that are TBTF. There is nothing in the bill to lead creditors to believe that the government will not make good on their loans to Goldman, J.P. Morgan, and the other banking behemoths.

There is a large and growing consensus across the political spectrum for breaking up banks that are too big to fail. Advocates of this position include former Federal Reserve Board Chairmen Paul Volcker and Alan Greenspan, Sheila Bair, the current head of the FDIC, and Simon Johnson, the former chief economist of the International Monetary Fund. There is no reason that we need financial institutions that are so big that they cannot be safely unwound without large commitments of government money.

The only people who seem to stand outside this consensus are those who hold power and are steering the process of financial reform. This is largely the crew whose regulatory failures gave us the current disaster. If they cannot learn from their mistakes, then someone else will have to drive the reform process.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy.

This article originally appeared in the The Guardian.



More articles by:

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

Weekend Edition
March 16, 2018
Friday - Sunday
Michael Uhl
The Tip of the Iceberg: My Lai Fifty Years On
Bruce E. Levine
School Shootings: Who to Listen to Instead of Mainstream Shrinks
Mel Goodman
Caveat Emptor: MSNBC and CNN Use CIA Apologists for False Commentary
Paul Street
The Obama Presidency Gets Some Early High Historiography
Kathy Deacon
Me, My Parents and Red Scares Long Gone
Jeffrey St. Clair
Roaming Charges: Rexless Abandon
Andrew Levine
Good Enemies Are Hard To Find: Therefore Worry
Jim Kavanagh
What to Expect From a Trump / Kim Summit
Ron Jacobs
Trump and His Tariffs
Joshua Frank
Drenched in Crude: It’s an Oil Free For All, But That’s Not a New Thing
Gary Leupp
What If There Was No Collusion?
Matthew Stevenson
Why Vietnam Still Matters: Bernard Fall Dies on the Street Without Joy
Robert Fantina
Bad to Worse: Tillerson, Pompeo and Haspel
Brian Cloughley
Be Prepared, Iran, Because They Want to Destroy You
Richard Moser
What is Organizing?
Scott McLarty
Working Americans Need Independent Politics
Rohullah Naderi
American Gun Violence From an Afghan Perspective
Sharmini Peries - Michael Hudson
Why Trump’s Tariff Travesty Will Not Re-Industrialize the US
Ted Rall
Democrats Should Run on Impeachment
Robert Fisk
Will We Ever See Al Jazeera’s Investigation Into the Israel Lobby?
Kristine Mattis
Superunknown: Scientific Integrity Within the Academic and Media Industrial Complexes
John W. Whitehead
Say No to “Hardening” the Schools with Zero Tolerance Policies and Gun-Toting Cops
Edward Hunt
UN: US Attack On Syrian Civilians Violated International Law
Barbara Nimri Aziz
Iraq Outside History
Wilfred Burchett
Vietnam Will Win: The Long Hard Road
Victor Grossman
Germany: New Faces, Old Policies
Medea Benjamin - Nicolas J. S. Davies
The Iraq Death Toll 15 Years After the US Invasion
Binoy Kampmark
Amazon’s Initiative: Digital Assistants, Home Surveillance and Data
Chuck Collins
Business Leaders Agree: Inequality Hurts The Bottom Line
Jill Richardson
What We Talk About When We Talk About “Free Trade”
Eric Lerner – Jay Arena
A Spark to a Wider Fire: Movement Against Immigrant Detention in New Jersey
Negin Owliaei
Teachers Deserve a Raise: Here’s How to Fund It
Kollibri terre Sonnenblume
What to Do at the End of the World? Interview with Climate Crisis Activist, Kevin Hester
Kevin Proescholdt
Secretary of Interior Ryan Zinke Attacks America’s Wilderness
Franklin Lamb
Syrian War Crimes Tribunals Around the Corner
Beth Porter
Clean Energy is Calling. Will Your Phone Company Answer?
George Ochenski
Zinke on the Hot Seat Again and Again
Lance Olsen
Somebody’s Going to Extremes
Robert Koehler
Breaking the Ice
Pepe Escobar
The Myth of a Neo-Imperial China
Graham Peebles
Time for Political Change and Unity in Ethiopia
Terry Simons
10 American Myths “Refutiated”*
Thomas Knapp
Some Questions from the Edge of Immortality
Louis Proyect
The 2018 Socially Relevant Film Festival
David Yearsley
Keaton’s “The General” and the Pernicious Myths of the Heroic South