Rolfe Winkler
Capital Jungle
Break up the big banks
President Barack Obama pledged on Monday “to put an end to the idea that some firms are ‘too big to fail.’” Though he outlined some worthy prescriptions, he failed to face up to the very size and power of the financial institutions that makes “too big to fail” possible.
For the big have gotten even bigger since the start of the financial crisis. At the end of 2007, the Big Four banks — Citigroup, JPMorgan Chase, Bank of America and Wells Fargo — held 32 percent of all deposits in FDIC-insured institutions. As of June 30th, it was 39 percent.
(If the image doesn’t load, click here.)
In total, they had $3.8 trillion worth of deposits as of June 30th. Compare that figure to the FDIC’s Deposit Insurance Fund, which showed a balance of just $10.4 billion on the same date.
The FDIC has been the most effective regulator since the onset of the crisis, closing down failed banks in order to limit risk to taxpayers. But its resources are woefully inadequate to deal with the largest institutions. (I am excluding the $500 billion credit line it has at Treasury; those are taxpayers’ resources, not FDIC’s.)
And that’s just the commercial banking side. These banks — especially Citigroup, Chase and Bank of America — have huge investment banking operations that are maddeningly complex and, systemically-speaking, very dangerous.
Obama certainly recognizes the problem — “the system as a whole isn’t safe until it is safe from the failure of any individual institution.”
But his recommendations — more stringent capital requirements, stronger rules and a “resolution authority” to cope with systemic meltdowns — won’t solve it once and for all.
To be sure, higher capital requirements are a very good start. They not only give banks a bigger cushion to deal with losses, they also limit the amount of credit they can flush through the system. This is a good thing: Too much credit is the air that inflates dangerous asset bubbles in the first place.
But higher capital requirements won’t make too-big-to-fail banks much smaller. At best they will penalize the biggest banks by reducing their returns on equity, giving smaller banks a leg up competitively.
A tax on assets is another good idea to discourage growth, but what we need is more aggressive action to force shrinkage.
For instance, resurrecting a version of Glass-Steagall would be highly sensible. Commercial banks have no business using their federally-insured balance sheets to finance risky investment banking operations. The two functions should be split.
And what ever happened to anti-trust laws? Among them, Citigroup, Chase and Bank of America control two-thirds of the credit card market. That stranglehold gives them significant leverage vis-à-vis consumers.
Another issue is derivatives, which Obama didn’t really address.
Notional exposure still totals tens of trillions at the biggest banks. Sure, many of these positions offset one another, but that assumes the daisy chain won’t break. To insure market integrity, the biggest players in it all have to get an explicit “there will be no more Lehmans” guarantee.
This gets to the heart of the issue. Though Obama says a return to “normalcy” means emergency rescue facilities can end, it’s a safe bet that they’ll come right back the next time we have a systemic event.
The only way to ensure we’ll never need them again is to eliminate too-big-to-fail banks. The fastest way to achieve that is to break them up.
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[...] Rolfe Winkler » Blog Archive » Break up the big banks | Blogs | [...]
HaHa–
Thank you for the clarification, though I must correct you on one point—I am not an idealist, but a social pragmatist. Relativism, it seems, divides us; that I am a proponent of both cyclic history and autarchic survivalism is perhaps why we differ regarding individual determination.
I do not refute your explanation of corporatism, but ultimately your abandonment of the resolve necessary to change it. “The way things are” is the coward’s mantra, crooned by the benefactor of others’ misery, or the man who for need of determination disavows his own. These words find no refuge among honorable men. So I ask you now, what anthem do you choose to sing?
I consider myself a pragmatist above all. Hence my previous statements.
I have never abandoned the desire to change the system. This is because I have always supported the system as it stands. Make of that what you will.
Perhaps you look down on those who say “It can’t be changed”. You probably also look down on those like me who say “the system is perfect as it is”.
But I look down on those who say “The system must change” without any idea of how they will change it, or what they will change the system into. If it isn’t idealism, then what? It certainly isn’t pragmatism.
People can say they want the system to change. But until they have the means to do it, it is just empty complaint. And while people have a god-given right to complain, it rarely has the practical effect needed to change things.
[...] the big banks have gotten bigger and bigger. Noted economist Mark Zandi says we have an oligopoly of banks, and that “the oligopoly has [...]
Wasted time waiting for the govt to do anything. Power belongs to the people. Deposits are what makes these banks grow. I decided months ago that Chase no longer served my best interests and moved my money to a smaller, local bank. Will be eliminating all credit cards as they are paid off since banks want to use “cashless society” against the people. Convenience is not always simpler, everyone must wrest back control of finances from these despots.
[...] everyone knows, the big banks have gotten bigger and bigger. Noted economist Mark Zandi says we have an oligopoly of banks, and that "the oligopoly has [...]
Bichler and Nitzan have written great stuff on all this. At http://www.bnarchives.net . Look for things on ‘differential accumulation’, ‘monopoly capitalism’ etc.
Theoretically, one of their original contributions is the argument that capital is not money but power in terms of both market share, political influence/control and cultural influence/control.
Secondarily that the typical business cycle involves alternating periods of general expansion versus contraction. That is normal, however in some of their papers they offer detailed historical analysis showing how during contracting phases, corporations ‘gain’ by maintaining or increasing relative market share and/or capital/influence viz. others in the same or related fields. So although their net income etc. may be declining, they are declining less than their competitors, many of whom either get wiped out or absorbed. Once this contraction phase is over, a smaller and relatively stronger group of leaders emerges (exactly as we are seeing in the banking and probably auto sectors right now for example), general expansion picks up again during which time startups can enter the fray, but when the next contraction comes along only the strongest survive and so on.
There is also evidence suggesting that the big players – who indeed increasingly become a more cohesive oligarchy over time – deliberately blow up the end of the expansion phases to bloat weaker players with too much credit in order to keep up with their competitors, and are also very savvy in terms of consolidating their power and influence during the hard times of severe contractions.
In other words, the trajectory of large-scale ‘capitalism’ is an inevitable one that consolidates power increasingly in the hands of a more and more condensed oligarchy. This process, they argue well, IS capitalism, not an aberration of it. By de-linking ‘capital’ from a largely monetary or investment-related definition (amount of $$ used to build factory etc.), they have revealed the true cultural and political dynamic of the beast.
It won’t go away unless force is met with force. There is no force organised in the current Republican Democracy system in the US to counter-act it.
The recent revelations from Sybel Edmunds detailing some of the techniques involving blackmail, bribery etc. to ‘hook’ dupes in the political, military, judicial and fourth estate, not to mention the Executive branches, show how widespread the systemic corruption/control is at this point. Voting in one or two honest Congress members won’t make any difference at all. Even a bona fide Third Party President would probably get nowhere, and if he did threaten to dismantle the oligarchy’s power overmuch, his life would be drastically and permanently shortened.
Semantics. It’s C R I M I N A L! There, one word, one meaning. Educate yourselves about the central banks history and the Bank of International Settlements and find out who, what, when and why.
Only until the global community wakes up from the fog of prevarication can we return to asset based economies and abundance for the masses.
[...] everyone knows, the big banks have gotten bigger and bigger. Noted economist Mark Zandi says we have an oligopoly of banks, and that “the oligopoly has [...]
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[...] the big banks are much bigger than they were in 1982. See this and this. What may have worked for 1982-sized banks won’t necessary work for the current [...]
[...] banking industry has become more and more consolidated, which has decreased financial [...]
[...] banking industry has become more and more consolidated, which has decreased financial stability. [...]
[...] banking industry has become more and more consolidated, which has decreased financial [...]
[...] banking industry has become more and more consolidated, which has decreased financial [...]
[...] do not prohibit you from working for Goldman Sachs or any of the other Big Four banks that controls 40% of market share. So you can always go work for a “too big to fail” national bank and put the [...]
[...] Bob Sullivan at MSNBC’s Red Tape blog: A tiny group of large banks dominate. In 2009, four banks — Citigroup, JPMorgan Chase, Bank of America and Wells Fargo — held 39 percent of all deposits in FDIC-insured banks, according to Reuters. [...]