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Politics : American Presidential Politics and foreign affairs -- Ignore unavailable to you. Want to Upgrade?

To: DuckTapeSunroof who wrote (41687)	3/8/2010 12:35:31 PM
From: TimF	Read Replies (1) \| Respond to of 71588

When financial institutions achieve 'mega' size, the systemic risks to our (and indeed to the entire world's) economy rises along with them. At some point yes, but that point is very unclear. Obviously with one institution you would have such a problem. But we are far from that level of concentration. --------------- Too Big To Fail — By Kevin Drum ...Kwak addresses all of these issues fairly persuasively. But to me it still has the flavor of a solution that's clear, simple, and wrong. After all, Bear Stearns was a quarter the size of Citigroup, and it was considered too big to fail. So just what would the limit be on bank size? $500 billion in assets? $200 billion? Can a country the size of the United States even have nationwide banks with limits like that? And what happens the next time around, when all these smallish banks overleverage themselves and collapse en masse? Are we any better off than we are with a few big banks failing?... motherjones.com --- Itty bitty banks That's Paul Volcker's idea, namely that the way to prevent "too big to fail" is to prevent "too big." Details are sketchy but Matt Yglesias offers some comments. Is there a precedent for this kind of plan working? We have antitrust law but antitrust law doesn't actually prevent big firms from becoming big; we've had General Motors, Microsoft, Google, and others, all very large relative to their sectors. You could imagine an absolute cap on the size of bank assets, so that above the size limit would-be loans and deposits are sent to a rival institution elsewhere by mandate. One implication is that banks won't have to treat their customers very well, since in a growing economy (we'll get one again, sooner or later) a lot of banks will be at the cap and will be turning away extra business. If different banks were perfect substitutes for each other, you wouldn't be seeing large banks in the first place. A second question is whether ten little banks are safer than one larger, 10x bank. For sure they are if the problem is one bonehead manager at the bigger bank, but what if it's systemic asset price risk? The smaller banks could well be less safe. In a financial crisis, would you rather be a larger country or a smaller country? I believe the plan would require very tight restrictions on off-balance sheet activity. Something like this may be coming anyway, and its rationale is understandable, but it is easier said than done. We would be requiring regulators to estimate the net "size" (it's debatable whether that word even applies; what is the "size" of a naked put?) of a bank financial position when banks themselves haven't been very good at doing that. A simple approach would be to ban all bank trading in derivatives but I believe that would increase bank risk more than decrease it, at least at this point. By the way the 1927 McFadden Act banned interstate branch banking, in part to keep banks small, and economic historians usually consider that policy to have been a disaster which contributed to the severity of the Great Depression. Here is a summary of where some of the debate on bank policy is at right now. Posted by Tyler Cowen on January 17, 2009 at 08:46 AM in Economics marginalrevolution.com ------ Too Small to Succeed? David Henderson Indeed, one of the major contributors to bank failures during the Great Depression was the National Banking Act of 1864. That law, according to monetary historian Jeff Hummel, an economist at San Jose State University, banned any branching (interstate or intrastate) by nationally chartered banks, except for a few grandfathered banks. Because banks during the Great Depression were so small, they were undiversified. So when the agriculture sector went under, in part because of the Smoot-Hawley Act that attacked free trade, many rural banks failed. Call it "too small, so we failed." This is from my article, "Making Banks Too Small to Succeed," published yesterday on AOL-Sphere. The following paragraph was cut: Obama's plan amounts to regulatory whack-a-mole: Take wild swipes at the problem and hope that it won't rear its ugly head again. His plans, in this area and others, would involve the federal government even more in our lives. But the federal government is simply too far removed, has no incentive to do it well, and is too big to plan for us. Let's hope Obama changes. econlog.econlib.org -------------------- And a contrary opinion -- Should Banks be kept Small? Arnold Kling Tyler Cowen does not see much help in keeping banks small. I agree with Simon Johnson, who thinks that big banks are too powerful politically. I think that the issue does pretty much boil down to political economy. Big banks are likely to be more powerful politically when they get in trouble. For small banks to be powerful politically when they get in trouble, a lot of them have to get in trouble at once. That can happen, of course, but it is more likely to result from an economy-wide shock than from idiosyncratic risk-taking. I don't think small banks are a perfect solution, but I think that big banks are going to wind up with the same quasi-public, quasi-private status as Fannie Mae. econlog.econlib.org