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!
“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.
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?