“Too Big To Fail” is Too Damn Big!

As a conservative and almost libertarian, I am not in favor of government intervention in the market place. But, the concept of financial institutions being Too Big To Fail (TBTF) is not a free market concept and so I say if they are too big to fail, they are too damn big!

From Wikipedia:

Too big to fail” is a colloquial term in describing certain financial institutions which are so large and so interconnected that their failure will be disastrous to the economy, and which therefore must be supported by government when they face difficulty.

From Reuters:

Dallas Federal Reserve Bank President Richard Fisher wants the biggest U.S. banks broken up, calling them a danger to financial system stability and their perpetuation a drag on the economy.

Even Allen Greenspan says:

U.S. regulators should consider breaking up large financial institutions considered “too big to fail,”

Not surprisingly, there are contrarian views. Forbes  for example say: Breakup The Government, Not “The Too Big To Fail” Banks. Well, that’s a pleasant thought; but does anyone believe we have time to wait for that to happen? The TBTF banks have, since Dodd-Frank, gotten even bigger and present even greater risk should another debt bubble burst. But the, maybe we shouldn’t worry because our Federal Reserve is taking care of the TBTF banks _ or maybe we should be even more worried.

The editors at Bloomberg want to know if JP Morgan is receiving corporate welfare

With each new banking crisis, the value of the implicit subsidy grows. In a recent paper, two economists — Kenichi Ueda of the IMF and Beatrice Weder Di Mauro of the University of Mainz — estimated that as of 2009 the expectation of government support was shaving about 0.8 percentage point off large banks’borrowing costs. That’s up from 0.6 percentage point in 2007, before the financial crisis prompted a global round of bank bailouts.

To estimate the dollar value of the subsidy in the U.S., we multiplied it by the debt and deposits of 18 of the country’s largest banks, including JP Morgan, Bank of America Corp. and Citigroup Inc. The result: about $76 billion a year. The number is roughly equivalent to the banks’ total profits over the past 12 months, or more than the federal government spends every year on education.

JPMorgan’s share of the subsidy is $14 billion a year, or about 77 percent of its net income for the past four quarters. In other words, U.S. taxpayers helped foot the bill for the multibillion-dollar trading loss that is the focus of today’s hearing. They’ve also provided more direct support: Dimon noted in a recent conference call that the Home Affordable Refinancing Program, which allows banks to generate income by modifying government-guaranteed mortgages, made a significant contribution to JPMorgan’s earnings in the first three months of 2012.

Gary North, one my favorite libertarian pundits did a post about the Bloomberg article. Here are his conclusions:

Conclusion: “The result is a bloated finance industry: As of 2011, the sector accounted for 8.3 percent of the U.S. economy, compared with 4.9 percent in 1980.”

Is this likely to change? No. The banks are major sources of campaign financing.

More important is this: the central banks have always served as sources of bailout money for the largest banks. This goes back almost a century in the USA.

Central banks exist to serve as the banking cartel’s safety net.

So, isn’t that just ducky! Our central bank, the Federal Reserve, has created a gravy train for the TBTF banks that by coincidence is about equal to their profits.  Maybe the Trust Buster, Teddy Roosevelt, was on to something.  JD Rockefeller faired quite well after Standard Oil was broken up and the share holders of AT&T made out just fine when that company was split up. So, I say it’s time to do a Teddy on the TBTF banks. We will all be better off.

Well, that’s what I’m thinking. What are your thoughts?

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26 thoughts on ““Too Big To Fail” is Too Damn Big!

  1. Of course they are getting fat, morbidly obese or government-provided corporate welfare.
    Our conservative-libertarian views are quite similar, and I agree with your conclusion. If their actions can adversely affect our government, then government can tell them what to do.

    I would prefer a severance, a wall of separation between bank and state. No more safety nets and government largess for them would focus their minds and bring sanity to financial markets

  2. Wishful thinking though. How do you take the life blood from the Leviathan? Funny thing about this issue is this is where Occupiers meet the Tea Party, i.e. evil banks, albeit from different angles. Also, I wonder if the goal is as simple as the usual goal..which is government take over the banks as opposed to the banking cartels owning them. Who do you think will win that one? Or would it even matter. I’m with Silverfiddle on “severance.” I don’t see politicians fighting this issue. Our local House Representative is covered up with banking campaign cash. Nice.

  3. Romney just blew it. Says obamacare is not a tax and agrees with Obama. So they are in the tank together. So it does not matter one whit.

    1. For me it depends on why Romney says it is a penalty. I claim it was intended to be a penalty under the commerce clause , which is why Roberts should have ruled against Obamacare instead of rewriting the law to make it a tax and, therefore, constitutional. Obama claims it is a penalty because he doesn’t want to be resposible for raising taxes on the middle-class.

      1. You’re right Jim. Romney has said he agrees with the descent, not with Roberts. Saying it’s not a tax is totally consistent with that position. The only thing he loses is the ability to claim Obama is levying the greatest tax on the middle class in history. But, with Taxmaggedon coming anyway, we don’t need to claim Obamacare as a tax to make that point. Romney is sticking with Obamacare being unconstitutional, far too intrusive into healthcare with mountains of regulation, much of it not yet even written, and just a plain, old fashioned, bad idea. Tear it up and start over. He’s now positioned to say (and he’ll be right when he says it), that we DO need to do something about health insurance, but it needs to be MARKET BASED, not government edict based. Romneycare actually WAS market based… at first, before Mass. Dems started piling onto the bill things that were never intended (many of of which were added after Romney left office). As usual, it is the government intrusion, such as mandating WHAT a policy MUST cover, that caused the biggest problems. The idea was to allow the market to create policies that were tailored to actual needs (empowering consumers, oddly enough) so that a high deductible, catastrophic coverage policy could be purchased cheaply for those who would rather pay out of pocket for the few times they interact with the health care system, but want to be covered if hit by a bus (or a disease equivalent). Naturally, given the do-gooder tyranical instincts of the Dems, they started saying what must be covered and prices went up, and low-cost options for getting services went away.

        My problem has never been with there being a mandate, though I don’t think it should be imposed by the government. I think the way to impose a mandate is to allow hospitals and physicians to turn uninsured people away (except in the case of a dire emergency… how much money is wasted on people with the sniffles and no insurance taking up emergency room space?). Create a second system (which would by its nature be second rate care) for those who are uninsured… I don’t know… like something charities run, or churches run, or volunteers run… If you buy health insurance, you have access to the best health care on the planet. If you don’t, well, you get what you pay for (or don’t pay for, as the case may be). That may seem cruel, but if combined with other things–like the ability to buy insurance across state lines to increase competition, getting rid of “what must be covered” government mandates and allowing insurance companies to provide a menu of desired coverages (I don’t need maternity coverage, or sex change coverage… I’m 51, unmarried, and comfortable being a man), along with measures that would allow for more entrepreneurial activity by doctors and nurses (like creating neighborhood clinics where you can get a check-up or have your sore throat diagnosed for cash), and, for God’s sake!, tort reform–I actually think it would work out that most people would buy reasonably priced insurance without big brother forcing them to do it.

      2. I hope you are right about Romney taking a market approach to health instead of another government program.

        It is true that people often abuse health insurance. I don’t have the answers , but I bet that thre are people out there that do have the answer.

  4. Cheryl’s right…this IS a point where the OWS and TP people agree……..too big businesses.
    I don’t know what to say about this….I’m a big business girl because it hires so many people, is innovative, etc… But, when big business gets too greedy or starts hurting people, it’s got to stop. This, I believe, supports my claim that capitalism doesn’t work without kindness/faith, etc… uhoh.

    1. Might I suggest that the primary problem is not with big business, it is with corporations. You see, a corporation is an artificial entity. It is not a natural person, but it is treated as such for the sole purpose of getting around individual responsibility and liability. This is contrary to natural law, which means it is guaranteed to fail – it’s just a matter of time.

      Corporations were not allowed by our founders (remember, they revolted in part because of the way the East India Tea Company was treating the Colonies). The founders had what were known as “Charter Companies,” and they remained entirely under public control and ALL had a built-in termination date past which they had to be renewed or dissolved. If you will look, you will find that both Jefferson and Franklin commented against allowing anything like what we have permitted the modern corporation to become.

      Another problem with corporations is that they are structured on the same model as the collective. Those who defend them claim they are “private property,” but how does when then explain that they are publicly bought and sold on a public exchange system? Also, a corporation literally cannot exist without society allowing it to exist. This is because it is a construct of the law. It does not naturally occur.

      Finally, the issue of greed is not connected to corporations – it is ALWAYS connected to individuals. It is just that, when you have the corporation paying any penalty for your actions, it becomes much easier to act irresponsibly – even immorally. This is why you will find greed everywhere – especially among those who claim to “deserve” what the corporations have because they “claim” it was stolen from them. well, in a country where you can still vote, if corporations are allowed to operate in a corrupt manner, it wasn’t “stolen” because the voter allowed it to happen. The key here is to watch for large corporations joining forces to take over sections of the economy – like having just 3-4 major car companies, or 3-4 major gas companies, etc. If this happens, and these corporate organs then partner with govt., you have the very definition of fascism that Mussolini said was a better description of fascism: corporatism.

      Oh, one more note for those who would argue we need large corporations. We do not! Before they were allowed to grow out of control, smaller, independently owned businesses formed what were known as co-ops. They work fine and they are a natural creature of the free market because they are based on the natural rights of freedom of association and freedom to contract. In truth, there is NOTHING the free market can’t handle – we just have to break free of the chains of govt. so we can get back to how the economy should be run: by each of us dealing individually with each other – not as groups and collectives.

      Anyway, just the 2 cents of a ranting lunatic. Hope they spark a thought or two 🙂

  5. I believe the phrase “Too big to fail” is just another way to categorize crony capitalism. Crony capitalism in my definition means the close relationship of businesses to the government, resulting in a market advantage. In this case the TBTF businesses are banks. Other businesses are GE, GM, and Chrysler. I am sure there are more, most likely in the defense industry.

    Corporations are one of the most efficient organizational structures in the modern world, and the world could not have been settled and industrialized without them. In and of themselves corporations are not evil, nor are they automatically benign. The governance of these organizations determines their relationship to government and society.

    I don’t believe big banks are inherently bad, but depends on governance, too. This includes capital reserves, risks taking, and ethical operations. I don’t believe that any bank is too big to fail. The reason banks become too big to fail is because the government has not lived up to its regulatory responsibility, and has allowed massive risks to be taken in areas where they should not be allowed. It seems that when this happens, the whole financial industry is in on the debacle, including mortgage banks, consumer banks, government entities, rating agencies, and insurance companies.

    I think the government (that’s us) has allowed a blurring of roles among these institutions. The original idea in the 1934 Act of keeping consumer banks out of the mortgage banking business, and vice-versa, is a good idea.

    1. OK, so please do me a favor and explain how we can look to ‘governance’ to control corporations and then reject ‘governance’ when it seeks to control our personal behavior in our private lives?

      Mind you, I am assuming you would oppose an overbearing govt., so, if my assumption is in error, I am ready to be corrected. But if I assumed correctly, then do you now see you are appealing — in principle — to the same ‘remedy’ that small govt. types oppose?

      🙂 (just friendly requests for clarification – since we don;t know each other)

    2. I understand what you are saying, Bob, that it is not just banks that are sometimes deemed to be TBTF. But the TBTF banks affect our entire economy and that of the world as well. When so much power is in so few hands, it becomes very dangerous. IMO, no bank should be allowed to be TBTF. If share holders and mangement were liable for the actions of the companies, they would probably be much more prudent.

  6. No company, no bank, no entity is TBTF. The banks did fail, they were just propped up before they crashed.

  7. I agree with Kurt. The problem started when consumer banking was allowed to be mixed in with corporate banking (your savings and checking and bank loans were mixed together with corporate investment and securities trading). Break that up!

    Better yet… (you see it coming if you know me)… Limited Purpose Banking–Laurence Kotlikoff!!!!

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