Posts Tagged ‘Banking reform’

What I’d do about Wall Street

October 17, 2011

The original title of this post was “What I’d do about the banks”.

What to do about the “too big to fail” banks is obvious.  There are many good ideas in circulation (none of them original with me).  The only problem is accomplishing anything through the current dysfunctional U.S. political system.

The most obvious and important thing to do is to break up the “too big to fail” banks.  As even Alan Greenspan has said, if a bank is “too big to fail,” it is too big to exist.  Since the banking crisis, the biggest banks have become bigger than ever, and have resumed the practices that caused them to fail in the first place.  As some point, they will become too big to save.

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Simon Johnson, former chief economist for the International Monetary Fund, and co-author James Kwak proposed in their 2010 book, 13 Bankers: the Wall Street Takeover and the Next Financial Meltdown,  that any bank be broken up if its assets are more than 4 percent of the current U.S. Gross Domestic Product or if the bank itself is more than 2 percent of GDP.   The exact percentage is unimportant.  What is important is that it be enacted into law, and not left to the discretion of regulators.  We learned from the 2008 crisis that regulators can’t be trusted to act in the public interest.

Their size limits would have applied to just six banks – Bank of America (16% of GDP), JP Morgan Chase (14%), Citigroup (13%), Wells Fargo (9%), Goldman Sachs (6%) and Morgan Stanley (5%).  Breaking up the banks would not affect their profitability.  When Standard Oil was broken up, its component parts – Exxon, Mobil, Sohio, Standard of California – did just fine.

If the banks threaten to pull up stakes and relocate to some financial haven such as the Cayman Islands, the answer would be: Let the Cayman Islands bail you out when you get into trouble.

The federal government should also:

  • Set up an orderly procedure for reorganizing bankrupt banks, as was done with savings and loan associations during the S&L crisis.  During the S&L reorganizations, the failed management was fired, the depositors were held harmless, the failed investments were liquidated and the good assets were sold to soundly-managed S&Ls.  The solvent S&Ls got bargains, but that’s okay.  They were being rewarded for good management.
  • Prosecute financial fraud.
  • Give regulatory agencies, including the new Consumer Financial Protection Board, the resources to do their jobs, and head them by people not beholden to the financial industry.
  • Reenact the Glass-Steagall Act, which separates commercial and investment banking.
  • Impose a stock transaction tax of some small amount, say 1/10th of 1 percent.  Individual traders and computerized trading programs destabilize the market by trading huge amounts of stocks and commodities several times a day.  A small transaction tax would not be noticed by regular investors, but would slow down speculative trading.

As an individual, you can shift your money to a non-profit credit union or savings and loan association if you have money in one of the “too big to fail” banks, or if you think your bank is abusing you.  I do not say all for-profit banks are bad.  Many of them perform their function, which is to provide a safe haven for savings, loans for businesses and credit for consumers.  But so long as the “too big to fail” banks are saved from the consequences of reckless and exploitative actions, the prudent and ethical bankers will be crowded out.