Kill the “Too Big to Fail” Banks

William Black in the New York Times points out some of the threats our big banks pose:

• The Obama administration claims that any failure of these largest banks will lead to a global crisis.
• These banks drove the deregulation and desupervision that started the financial crisis and led to taxpayer bailouts (primarily through the Fed, not TARP).
• These institutions, which have grown since the crisis, used their political power to block the legislative reforms essential to prevent our recurrent, intensifying crises.
• They continue to cripple effective regulation and supervision.
• They distort the economy, making it inefficient and more prone to crisis.
• They pose a fatal risk to our democracy. The Citizens United decision protecting corporate political contributions has increased their political power.
• Shrinking these large banks would substantially increase their efficiency.
• The discredited rationale for these large banks is the international “competition in regulatory laxity” — if Germany allows its “universal” banks to be self-destructive, we should do the same.

There is nothing wrong with banking as a thing – as long as the banks remember that their primary responsibility is the diligent care of the funds entrusted to them.  As we turn our excess money over to them – representing the hard work we have done – we fully expect that the bank will ensure that, come what may, we’ll be able to obtain all our funds back upon demand.

In the normal course of events – ie, when we have wise bankers who understand their responsibility – this works splendidly. The bank takes the money of the depositors and carefully uses it for wise investments which return a tidy profit to the bank while safeguarding the wealth entrusted to the bank by depositors.  The problem we have is that for some time now our banks have not been following the normal course of events.  Essentially, and for a variety of reasons, the banks – and especially the largest banks – have felt that just making a tidy profit while carefully guarding the depositors’ money isn’t good enough.  The banks have felt they need very large profits, endlessly increasing over time – the whole system of banker pay in the higher reaches is predicated upon this.

But there is no honest way to get rich quick.  The real world doesn’t work like that.  The only way you can get rich quick is to do something dishonest – for bankers, this works out to things like credit default swaps, mortgage-backed securities, junk bonds, derivatives and a host of other scams.  They take our money and play around with it and turn high profits in actions are there mere moving of money from one fool to a greater fool.  All goes well for a while, but since the money isn’t being used for careful investment we eventually get caught in the fact that nothing of value is being created…and then crash goes the financial system.

This, in and of itself, wouldn’t be so bad – the banks would do it once, and then be crushed because of it and then wiser bankers would come along who had learned their lesson.  But we have this problem – the financial chicanery which was used to create a period of high profits draws in all sorts of people – political people, who control the government purse strings.  They don’t want their own share of the scam to crash and burn and so they cook up ways to bail out the banks…to use the nation’s taxpayers as a means of making good the stupid investments the banks made.  And so the problem perpetuates and becomes worse over time – until we get the 2008 financial crash.

The key to financial survival is to allow the “too big to fail” banks to fail.  Pull the plug – no more Treasury or Federal Reserve back stopping.  If they are insolvent, in to bankruptcy they go.  Smaller and wiser banks will emerge from the wreck – and we pass laws forbidding even a cent of government money to ever bail out any financial institution.  Live or die by the level of investment skill, not by level of bribery for the political class.

Yes, it will be painful to have all these banks suddenly go out of business.  The financial dislocation will be severe – but far easier than continually bailing them out until we’ve got such a mountain of debt and bad loans that our whole economy is crushed.  In the end, we can try to save the banks and still be financially wrecked, or let them die and start to repair our finances.  Its really just as simple as that.

Read more at Noonan for Nevada