Too Big To Fail Intensifies

Posted by Jeff Carter
on March 20th, 2013

Since the bank bailout of 2008, or maybe it really began in August of 2007, average people have been complaining about Too Big to Fail. My question is, “What did anyone expect?”.

Since President Clinton advocated for the repeal of Glass-Steagall, banks have been on a growth trajectory. There are some good business case reasons for hyper large banks. One is hyper large corporations. A hyper large bank can service a hyper large corporation more efficiently.

But, it wasn’t just Clinton. ” government actions during President George W. Bush’s term to push the purchase of the collapsing Bear Stearns, Merrill Lynch, Wachovia and Washington Mutual.” resulted in a lot of merger activity in the entire banking sector.

In the old days, companies might have to cobble together financing and there was added expense. Banks specialized in certain industries. There was more fragmentation. Brokerage houses and investment banks were similar. Who remembers EF Hutton?

When government started down the path of over regulation of banks beginning with the bank bailouts, it set the stage for very large banks to become hyper large banks. EF Hutton and the rest of the smaller brokerage houses were swallowed up. They are as extinct as the carrier pigeon.

Politicians and bureaucrats felt justified to over regulate since they were signing the checks to keep them in business. All the action brought us one of the most ineffective and useless banking/finance laws every produced by a legislative body, Dodd-Frank.

Now that we are stuck with it, everyone on all sides of the issue complains. Banks are too big. Community banks can’t afford the hyper regulation and credit has slowed down. Getting a commercial loan can be like pulling teeth. The velocity of money is slow and it doesn’t turn over.

American Banker echoes my thoughts, ” the crisis had not even finished unfolding, and on both sides of the pond, we rushed to come up with regulatory frameworks so that the devastation would never happen again. As time passes, we are seeing that Basel III, Dodd-Frank and European Market Infrastructure Regulation may not address all the causes of the crisis, and certainly cannot incorporate predictions about what may cause the next one.”

It’s pretty amazing to people like me and Patrick Young that regulators on both sides of the Atlantic could be so stupid at the same time. Maybe we were better off without all this interconnectedness!

Now that the tower has been built, it’s going to be awfully tough to take it down. President Obama can’t put on his “Theodore Roosevelt hat” and bust up trusts. The resulting financial panic would send everyone over a ledge.

What has to happen is a thoughtful redo of regulatory structure that will create different economic incentives. Then the market will sort itself out. Having private companies sort themselves out will cause less pain for all Americans than to have government action mandating something.

The bureaucrats and politicians are rarely right.

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