It seems to me that the key here is to remember that maybe some institutions are too big to fail, but they aren’t too big to suffer! In particular, they aren’t too big to have their top managers booted out–without bonuses. They aren’t too big to have their shareholders wiped out, and the company handed over to bondholders–who are then likely to end up taking losses as well. One task of financial regulators should be to design and pre-plan an “orderly resolution” as they call it. The trick is to devise ways so that if these systemically important firms run into financial difficulties, the tasks and external obligations of certain large financial firms will not be much disrupted, for the sake of financial stability,but those who invest in those firms and who manage them will face costs.
Taylor points to an interesting report on the banks that are currently classified as too big to fail.
I think that when the time comes, “orderly resolution” will always seem to be an oxymoron. The bankruptcy of Lehman Brothers was resolved in an orderly way. The only problem was that one creditor, Reserve Primary, had loaded up on Lehman paper, so its money market fund shares were no longer worth a dollar each. The Wall Street-Washington axis saw this as a catastrophic event, and thus was launched TARP and other bailouts. In restrospect, these seem to have been mostly robbing Peter to pay Paul: taking money from GM investors and giving it to the unions, selling off AIG’s profitable lines of business in order to provide cash to Goldman Sachs and foreign banks, etc.
The way to think about this issue is to remember how Freddie Mac and Fannie Mae handled their too-big-to-fail status. They knew that their biggest risk was political risk, so they acquired tremendous political muscle. Conversely, members of Congress knew that Freddie and Fannie would be pliable, so these members leaned on Freddie and Fannie to pursue “affordable housing” goals. We know how that worked out.
Political officials and big banks have plenty of opportunities for mutual gains at the expense of taxpayers. That is why I have long favored breaking up big banks. It’s not that big banks produce more inherent instability. It’s that they produce more inherent cronyism.
I commend Elizabeth Warren for this exchange.
http://youtu.be/mavB1lbtIow
It is hard to see any use for big banks. However, I’m loath to legislate that a certain size is “big enough,” even if that might make sense, because how is the govt to know what is too big? On the other hand, it seems we now have a government so big that it encourages banks to get big, because they know they will get bailed out by big govt. Yes, I’m torn.
Reminds me of the telecom sector, where we have giant monopolies largely because of govt interference in the market, so why shouldn’t the govt interfere to keep them from consolidating further, ie the blocked AT&T/T-Mobile merger? Jon Huntsman actually had a good idea here: make the really big banks pay into an extra bailout fund, money that would be kept aside to pay for times like we just went through.
The fundamental problem here is that shareholders and creditors don’t seem to learn the lessons of all these failures and demand smaller banks. You can’t blame that all on bailouts, as shareholders were mostly wiped out when most of these banks were merged or went under, and I don’t think most creditors were factoring a bailout into their decision to lend. Maybe some savvy ones, who might even have lent a lot on that premise, but not most. So there seems to be some fundamental market irrationality here, which I have no confidence the dimwits in govt can fix, let alone wrap their heads around.
I’m afraid we’re stuck with the status quo for another decade, till online ventures put all the current banks out of business. Banking is an information business, it is as prone to being disrupted as any other, just like news or education. The problem is that banking is so highly regulated that you have to throw off those strictures first, which is why nobody bothers, as that’s harder. But it can be done, just as the bankers found a way to manufacture AAA securities out of shitty mortgages, to get around similar dumb regulations and regulators.
“Lez med’tate on that” as my Evidence professor of some 60-odd years back would say.
The very use of the word “institutions” admits that we are dealing with the establishments that have structures. The conclusion that the sizes rather than the nature of the structures require resolution should be re-examined.
The Titanic did not sink because of its size. Its failure for its functions arose from its structure and the way that structure was operated (navigated). The improvements in the functions of capacity and speed of vessels that followed resulted from changes in structures and navigational methods and facilities.
To paraphrase Peter F Drucker, there has been a failure to regard large-scale business enterprises, particularly those in financial areas, as human organizations, but rather as sources of economic data, which have become the presumed causes of numerous effects.
It is the fundamental structure (management) of the institutions that needs to be examined and modified in ways that have not been considered since the Massachusetts Business Trust was superseded by The Modern Business Corporation. This is not “news.” The impact of the separation of control of surpluses and capital from the beneficial ownership, through the fragmentation of interests in “publicly held” enterprises has had intellectual attention for over 80 years now.
The accumulated surpluses which constitute the basis for the “real” capital of the developed economies are now controlled by layers of management, extending from direct operations, back through “asset managers,” mutual fund and pension managers, etc. all standing between the ultimate beneficial owners and actual control; each layer of management, with differing motivations, having differing objectives, yielding in the aggregate Managerial Capitalism.
Better than look for the theories of “policy analysts” or economists, we would do well to look back at the works of Peter F Drucker on the subject of “Management.” We may not find the answers, but we will have a better understanding of the problems.