'Too Big to Exist' Bill Would Impose Market Discipline
11 comments
by: Karl Denninger
November 10, 2009 | about: BAC / C / JPM / WFC
seekingalpha.com
Senator Sanders has filed a bill called "Too Big To Fail, Too Big To Exist."
Unlike the 1900 page monstrosities, this one will take you just minutes to read. It is two whole pages.
It should become law tomorrow.
There will be those who argue that this is "anti-capitalist."
On the contrary; by refusing to force banks and other institutions to adhere to the fundamental principle of sound fractional lending - that is, insisting that for each dollar of unsecured lending outstanding at any instant in time the institution hold one dollar in actual capital we have extended the credit of the sovereign (in this case The United States) through allegedly-private institutions.
This is the sin upon which all the screaming for "bailouts" rest, for without violating this fundamental banking principle there would never be a need for a bailout, as each institution would always, at any instant in time, be able to cover every withdrawal through both asset sales at the market and excess capital held.
I therefore fully support Senator Sanders' bill and urge you to head to his petition site and sign it.
Those who argue that banks and other firms should be able to grow as large as they like cannot get past the above italicized paragraph. No firm is limited in size, but no firm should be able to leverage the government's credit for it's own private purposes, as we have seen that each and every time it is allowed these institutions use that leverage to screw the consumer and then force the taxpayer to bail out their bad lending decisions.
Senator Sanders has the right solution - one that allows firms that do not wish to be broken up to raise sufficient capital so that each dollar of unsecured lending is backed by one dollar of capital.
Such a firm, irrespective of size, would not be "too big to fail"; as such this bill would impose market discipline - not, as I'm sure detractors will argue, "socialism."
Author's Reply:
Dollar for dollar for UNSECURED lending.
Loan $200,000 on a $300,000 house, you need hold no capital against it.
Want to lend $200,000 against a $100,000 house? You get to hold $100,000 in capital.
Why? Because otherwise you're lending THE SOVEREIGN'S CAPITAL!
This is THE foundation of sound banking. And, by the way, it is how banking USED TO BE done. For home mortgages it was 20% down in cash, 28% front end ratio, 36% back end. There were darn few defaults too, and those that happened left the bank whole, as it could sell off the asset. |
