Bernie Sanders: Break Up the Big Banks

[lazyboy]

http://www.bernie.org/uncategorized/bre ... ks/#scroll

Sen. Bernie Sanders (I, VT) interviewed last week on CNN with Wolf Blitzer- presents some cogent arguments to demonopolize Wall Street Banks and probably why that will be difficult to do given the fact that Wall Street controls Congress.

[hoost]

I read an article this morning that also suggests restoring Glass-Steagall.  The argument makes sense.

[Ad Orientem]

At the risk of having my libertarian card seized and shredded I agree with both the preceding suggestions. The really huge banks need to be broken up and Glass Steagal should be reinstated.

[Pointedstick]

At the risk of having my libertarian card seized and shredded I agree with both the preceding suggestions. The really huge banks need to be broken up and Glass Steagal should be reinstated.

I too am a Libertarian, but reinstating Glass-Steagall would only be an affront to liberty if we actually had a free market banking system. What we have today is more like a bunch of publicly-backed pseudo-private banks.

[craigr]

If banks were allowed to fail you'd have less problems. The Govt. could easily cover depositors but allow share and bond holders to get wiped out in bank failures. But you can't keep bailing out bad decisions and expect the actors to behave properly going forward.

[hoost]

At the risk of having my libertarian card seized and shredded I agree with both the preceding suggestions. The really huge banks need to be broken up and Glass Steagal should be reinstated.

Yes, that's why I found the article I posted very interesting.  Rothbard, the ultimate free market Libertarian suggested that Glass-Steagall was better than the current system.

[MachineGhost]

I too am a Libertarian, but reinstating Glass-Steagall would only be an affront to liberty if we actually had a free market banking system. What we have today is more like a bunch of publicly-backed pseudo-private banks.

Reality vs Theory.

[WiseOne]

If banks were allowed to fail you'd have less problems. The Govt. could easily cover depositors but allow share and bond holders to get wiped out in bank failures. But you can't keep bailing out bad decisions and expect the actors to behave properly going forward.

Absolutely agree.  If bailouts must occur though, how about this: make bailouts an unpleasant experience for the firms rather than a free ride.  To wit, until they pay back the money, the firm should be considered publicly held, and all compensation should be set based on government pay scales (GS1-??).  And no bonuses.

Watch how fast they'll fix the problem and repay the loan.  With interest.

[MachineGhost]

Absolutely agree.  If bailouts must occur though, how about this: make bailouts an unpleasant experience for the firms rather than a free ride.  To wit, until they pay back the money, the firm should be considered publicly held, and all compensation should be set based on government pay scales (GS1-??).   And no bonuses.

Aren't government pay scales already higher than the private sector?

[lazyboy]

If banks were allowed to fail you'd have less problems. The Govt. could easily cover depositors but allow share and bond holders to get wiped out in bank failures. But you can't keep bailing out bad decisions and expect the actors to behave properly going forward.

Another point of view about this:
http://www.nytimes.com/2012/05/21/opini ... yt&emc=rss

[MachineGhost]

If banks were allowed to fail you'd have less problems. The Govt. could easily cover depositors but allow share and bond holders to get wiped out in bank failures. But you can't keep bailing out bad decisions and expect the actors to behave properly going forward.

Another point of view about this:
http://www.nytimes.com/2012/05/21/opini ... yt&emc=rss

Isn't Krugman conflating shareholder and boldholder risk with depositor risk?  Depositor liabilities on the balance sheet are shielded and protected from investment performance in commercial/retail banking.  There is no risk to the depositors and the FDIC and COC is there to make sure that is so.  JP Chase is no longer an investment bank, it is now regulated as a commercial bank -- a caveat all former investment banks (less Goldman Sachs?) had to make in order for them to access the Fed's discount window and protect their bondholders from taking a haircut.

The thing about the subprime crisis in 2008 was the Federal Reserve had no legal authority under the Federal Reserve Act and bankruptcy laws to take over and orderly wind up investment banking firms, only commecrical/retail banks.  That hole was supposed to be the main issue Dodd-Frank addressed instead of going off the reservation.

So I don't see how even more regulation is needed or useful unless overtuning Glass-Steagall also overturned depositor regulatory protection, which I seriously doubt.

[lazyboy]

From the Krugman article:

"The point is that it’s not O.K. for banks to take the kinds of risks that are acceptable for individuals, because when banks take on too much risk they put the whole economy in jeopardy — unless they can count on being bailed out. And the prospect of such bailouts, of course, only strengthens the case that banks shouldn’t be allowed to run wild, since they are in effect gambling with taxpayers’ money."

From my limited perspective, there is a social and economic cost to bad behavior on a large scale. Whether a bank gets bailed out or even if allowed to fail and the FDIC rescues the depositors- it's still going to be costly. Although I agree with Craig's point about not bailing out bad actors, there may be a limit to what a weakened FDIC can do if there is a bank run. On a large enough scale, failure is perceived to not be an option. Everyone sounds the panic alarm, the bad actors get bailed out and it's business as usual. I think that's the operational reality whether we like it or not. It's better all around if banking and investment were legally separated. 
I'm thinking back to the Lincoln Savings and Loan debacle http://en.wikipedia.org/wiki/Lincoln_Sa ... ssociation. The federal government covered 3 billion in losses. At the time this was a huge deal and added to the debt everyone carried.
MG- I don't know enough to comment on the points you've made about JP Chase.

[hoost]

From the Krugman article:

"The point is that it’s not O.K. for banks to take the kinds of risks that are acceptable for individuals, because when banks take on too much risk they put the whole economy in jeopardy — unless they can count on being bailed out. And the prospect of such bailouts, of course, only strengthens the case that banks shouldn’t be allowed to run wild, since they are in effect gambling with taxpayers’ money."

From my limited perspective, there is a social and economic cost to bad behavior on a large scale. Whether a bank gets bailed out or even if allowed to fail and the FDIC rescues the depositors- it's still going to be costly. Although I agree with Craig's point about not bailing out bad actors, there may be a limit to what a weakened FDIC can do if there is a bank run. On a large enough scale, failure is perceived to not be an option. Everyone sounds the panic alarm, the bad actors get bailed out and it's business as usual. I think that's the operational reality whether we like it or not. It's better all around if banking and investment were legally separated. 
I'm thinking back to the Lincoln Savings and Loan debacle http://en.wikipedia.org/wiki/Lincoln_Sa ... ssociation. The federal government covered 3 billion in losses. At the time this was a huge deal and added to the debt everyone carried.
MG- I don't know enough to comment on the points you've made about JP Chase.

This seems like a pretty good analysis.  The question is what is the solution?  More/different regulation or a different system altogether?  It seems like no matter what system we have, the bankers end up using the government to make the system favor them.  Which system would minimize this best? ... I'm not saying I or anyone has the best answer to this, just throwing it out there as something to think about.

[moda0306]

I think the US monetary system is somewhat akin to the freeway as a transportation system.  Some may think that freeways (or money) should be handled by the private sector alone.  Whether they're right or not, we DO have a government-run transportation system, and it's probably in our best interests to realize that we can either fight to make it go away, which it never will, or fight to make it better, which is quite possible.

I tend to view both as legitimate roles of government, but even if I didn't, I still wouldn't want the government to, in the name of "insuring liberty" and controlling costs, having no speed limits, no lines, no signs, etc.  That system would be a disaster, but, technically, it would be more "free" and lower cost than a system where they paint lines on the road that you have to stay between, and enforce some reasonable speed limits.

I view money the same way.  We have the government playing a significant role in the money market.  I'd rather have rules of the road in place at the entities most connected to that role of government (banks), rather than tell the government to not regulate the road it built in the first place.

I can understand skepticism of the self-fulfilling nature of government, but jumping half way accross the canyon still seems like a horrible compromise.

[MediumTex]

I think that we should privatize the big banks. 

[hoost]

I think the US monetary system is somewhat akin to the freeway as a transportation system.  Some may think that freeways (or money) should be handled by the private sector alone.  Whether they're right or not, we DO have a government-run transportation system, and it's probably in our best interests to realize that we can either fight to make it go away, which it never will, or fight to make it better, which is quite possible.

I tend to view both as legitimate roles of government, but even if I didn't, I still wouldn't want the government to, in the name of "insuring liberty" and controlling costs, having no speed limits, no lines, no signs, etc.  That system would be a disaster, but, technically, it would be more "free" and lower cost than a system where they paint lines on the road that you have to stay between, and enforce some reasonable speed limits.

I view money the same way.  We have the government playing a significant role in the money market.  I'd rather have rules of the road in place at the entities most connected to that role of government (banks), rather than tell the government to not regulate the road it built in the first place.

I can understand skepticism of the self-fulfilling nature of government, but jumping half way accross the canyon still seems like a horrible compromise.

I can go along with your likening of the monetary system to the freeway system.  It seems to me that if the government is going to be involved in the freeway system, there would most definitely need to be lines, etc.  To have government owned freeways with none of these things would be a disaster.  Now that's not to suggest that if freeways were private, there would be no lines, speed limits, etc.  Those rules would be left up to the owner of the freeway to decide and enforce, whose decisions would ultimately be dictated by consumers' prefernces.  As an aside, I'm not sure how a truly free market road system would operate; that's beyond the scope of my brain.

I think that a good start would be to reinstate Glass-Steagall to separate investment banks from commercial banks.  I think it would also be much better to move toward a mandated full reserve banking system, or to at least have something much closer to that than we do now.  Actually, if banks were required to move to full reserves, Glass-Steagall may not even be necessary.

In a truly free market banking system, banks would be forced to hold close to full reserves, because if it was discovered that they were over-leveraged people would come to the bank and demand their money.  Eventually they would run out and be bankrupt.  This would require that banks not be allowed to suspend redemption of demand deposits, as they were able to do in the 1800s.  I'd say though, that it's probably unlikely that would happen, because as I said earlier, I think the banks would take over the politicians and they would be allowed to suspend payment during a bank run, so a legislative requirement for full reserves is probably better.

I think that we should privatize the big banks. 

  Agreed; I'd say we should fully privatize the big banks, instead of privatizing only the gains.

[moda0306]

hoost,

I disagree with your assertion that fractional-reserve lending is a machination of government.  We may callt hem "demand deposits," but we understand and accept that the bank only holds fractional reserves... this isn't held secret to anyone.  I think the supply/demand equilibrium in a non-FDIC world would surely be more on the cautious side, but by no means do I think that it'd be automatically a full reserve system.

Remember, when a bank makes a loan, the borrower has a right to take it out of that bank, or out of the banking system altogether.  If he chooses to keep those dollars deposited in the banking system, that's his free choice to re-engage a risky system.  People engage in the system willingly.  They could always pull it out or put it in a treasury direct account.

[hoost]

Sorry for the delayed response, Moda.  I've been quite busy with work the last few days.

I've sort of lost my frame of reference from this discussion.  I had to look up the definition of machination.

The first thing that pops up from google:

intrigue: a crafty and involved plot to achieve your (usually sinister) ends

I'm not sure I would go that far; I would probably say that government makes it possible.

What would banks be like if there was no government?  Yes, it's unrealistic to think there would ever be no government, etc. etc., and having no government probably isn't a good thing, but consider the question.

Would you put your money in a bank for safe-keeping if they were just going to give it to someone else and couldn't necessarily pay you back?  I personally would think twice.