In the past few decades, banks and similar institutions have been allowed to consolidate, to get involved in businesses that had previously been out of bounds for them, to engage in a wide variety of scams, cons and ponzi schemes, all with impunity. Anyone familiar with the work of the Pecora Commission, John Maynard Keynes, and a host of others, could have predicted the consequences, and many did, from Byron Dorgan to Paul Krugman, to Brooksley Born, to Noriel Roubini. But they proved Cassandras. Five years after the bubble collapsed, the big banks are even bigger, yet instead of providing better services at lower cost, they're engaging in an ever growing list of petty scams--instead of offering interest and free checking, banks are charging for everything. A series of probably criminal and certainly incompetent screwups at Chase, Citi, HSBC and others indicate that this is not a successful business model. This is a race to the bottom. An astonishing series of unchallenging interviews by supposedly real reporters reveals that the men in charge do not understand, and do not care how the economy works, and do nor care what the consequences of their behavior is to 99.999% of the population. They're only interested in feathering their own beds.
The right thing at this point would be to do what Simon Johnson recommended 4 years ago and nationalize the banks. It might not be necessary to take them all, but certainly anybody with more than a handful of branches....assets over around $500M or so. The local banks and credit unions are often doing reasonably good service but are being swept up by the downdraft of the giants. All senior management of the giants should be banned for life from any business related to banking. I'm thinking burning at the stake would be about right, but sadly, the constitution bans that. The "national" bank would renegotiate mortgages and other loans and begin lending at traditional market rates. Like banking, it could be a profitable business, but as a government bank, it would be forbidden from making a profit, which eliminate most of the scams that the big banks now employ. As the economy improves, it could begin spinning off more and more small banks, which engage strictly in commercial banking and have rules analogous to the FDIC rules about capitalization, leverage and types of investment. But whenever one of them exceeds the size threshold, back into the national bank they go. If the banks are smart, they'll split themselves up before this happens.
It's probably not necessary to put such an onerous size limit on investment banks. They deal with larger amounts of money--frequently a single investment is larger than the cap on bank size would be. They're also not as subject to capitalization requirements. But they should still be small enough that if they fail, they fail, period, and the government can never feel tempted to step in. I think this puts an absolute limit of about $50B on them--about 1/3% of GDP.
In 1911, Standard Oil, which until then had about 70% of the US petroleum market, was split into 33 smaller companies. Within 5 years, 9 of them were larger than Standard had ever been. Petroleum was at the time a growing business, while banks are necessarily a finite share of the economy, but this is suggestive of what could happen if we broke up the banks. Imagine banks gaining customers because they're providing better service! I remember that happening in the 1970s and even into the 1980s a little. I know it could happen again. It doesn't need to be a race to the bottom, and we must not allow it to happen again.
Unfortunately, we probably missed our moment--the year or so after the Sept 2008 collapse. During the '30s, President Hoover and his allies did almost exactly the wrong thing, so Roosevelt had a mandate to really fix the problem. Bush, Paulson, Bernanke and Obama didn't actually compound the problem the way Hoover had, and although they didn't actually fix it, the TARP, the ARRA, Quantitative Easing and the symbolic but feckless "stress tests" put enough of a band-aid over it to start a slow recovery. We may need another bank-driven recession to give us the political will. The consequences of this will be terrible, but it may make us stronger in the end.
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