When financial institutions achieve 'mega' size, the systemic risks to our (and indeed to the entire world's) economy rises along with them.
This is the "too-big-to-be-allowed-to-fail" problem in a nut shell.
As I have previously indicated... my PERSONAL PREFERENCES for "How to RESOLVE this potentially deadly nation problem?" are contained in these three simple ideas:
1) Anti-Trust law is important, (and can and should be employed when mega-sized institutions wish to merge), but the more clever and less disruptive way to prevent this ever-rising systemic risk is to DE-INCENTIVIZE the "too big to fail" sized institutions. RAISE RESERVE REQUIREMENTS progressively the larger these institutions become. Have 'tiers' established for which each larger tier is REQUIRED to hold more and more back in reserves. This will serve two purposes: A) if the MEGA-sized firms stay mega-sized at least the risk they pose to the economy will be lessened because they are better reserved. B) if, as I think likely, they take the hint and voluntarily split into smaller, more focused, units we will wind up with a more vigorous and likely innovative national economy. And the "too big to fail" heads-private-money-profits-and-tails-the-taxpayers-eat-the-losses problem is spiked... because there will be no more "too big to fail" firms.
2) The 'Volker Rule' --- maintain a legal separation between taxpayer guaranteed deposit taking institutions and all risky (non-traditional banking) sorts of activities which could give rise (AIG or L.T.C.M like) to a company destroying and economy imperiling crisis... (prop. trading, sponsorship of hedge funds, private label non-reserved CDSs, etc.) This provides an even greater circuit breaker between the extremely risky (and predictably often exploding) high margin activities and the broader national economy complete with it's important reliance upon CONFIDENCE in the stability of our financial institutions, (and the safety of deposits and investments therein.)
3) Discipline (long overdue) on the part of government when forced (as they periodically have been) to rescue operations such as the Savings and Loan bailouts of the 'eighties, or the recent financial collapse bailouts of the 'oughts --- Do not OVER PAY. When the letter of the deposit guarantee law only specifies that deposits up to $250,000 are federally insured... do not pay one penny more to any who were careless enough to leave deposits larger then that uninsured. When the letter of the law makes NO GUARANTEE for unsecured bondholders in these institutions (debentures, etc.), then let them EAT THEIR LOSSES, (And learn to be more careful next time, not reliant upon Uncle Sammy coming to the rescue of the rich and well off each and every time), exactly *unlike* what we did back during the Reagan era S&L bailouts (when taxpayers got stuck paying for even the UNINSURED LOSSES), and unlike the principles that were just followed in 2008 with the AIG rescue... where no haircut AT ALL was forced on the mega-bank counterparties for all those AIG Credit Default Swaps.
Three principles and policies to follow, and that's what it will take to solve the problem and dire risk of "too big to fail".
Absent such effective action we are doomed for a repeat. And, since each crisis is getting bigger and bigger... the next one will probably doom us.... |
