Reports from the Economic Front

a blog by Marty Hart-Landsberg

Too Big To Fail

Our financial system is dominated by banks considered too big to fail.  And that is a problem for the rest of us.  As Time Magazine explains:

“Too big to fail is opposed by the right and the left, though not apparently by the people drafting legislation,” says Simon Johnson, an MIT professor and the author of a recently published book on the subject, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown. “The current financial-reform bills are effectively a wash on the issue.”

The question is how large banks ought to be allowed to become. When large banks run into trouble, regulators are often unwilling to let them fail, as bank failures can wipe out individual depositors. What’s more, banks often fund their operations by borrowing from other banks. The bigger the bank, the more likely it is to put other banks at risk if it fails. Mass bank failures, especially of big banks, means people can’t get loans. And no loans, no economy.

That’s why the government decided to bail out most of the nation’s largest banks at the height of the financial crisis. And here’s where the problem potentially gets worse. Once bankers understand that the government will bail out their firms when their loans or other financial bets go bad, they are likely to take riskier and riskier bets. That, of course, leads to more potential bank failures — and more taxpayer-funded bailouts.

Not only have attempts at reform largely failed, government regulators have often tried to paper over financial problems by encouraging our dominant banks to swallow smaller, less stable ones, thereby worsening the problem.     

So, who are our “too big to fail” banks and how did they get so big?  Here is a time line that charts the process and highlights the winners.

328240_139434879491415_100002747126914_140493_2014881848_o.jpg

 

Of course there are answers to this “too big to fail” problem.  One is turning our banks into public utilitiesHere is Yves Smith talking about this solution.

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One response to “Too Big To Fail

  1. Dylan November 2, 2011 at 1:46 pm

    Whoa. That chart really puts it into perspective, doesn’t it?

    I could never understand the knee-jerk reaction of most people I talk to when putting forth the idea of making large banking institutions public utilities. Most seem to respond with the following: “why would you want a government bureaucracy in charge of your money”? Implicit in this question is that the private bureaucracy, which isn’t subject to any kind of pressure (save but direct action in the form of protest – thanks OWS and friends), is more favorable.

    Since I am not the most economically astute, what would your response be to someone who is skeptical of Smith’s idea?

    Like

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