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Wednesday, December 16, 2009

Much, Much, Much too big to fail

Peter Eavis of The Wall Street Journal, which is a great source for this sort of thing, notes that the "too big to fail" banks are only getting bigger and bigger and bigger:

"The top four banks have combined assets of $7.4 trillion, or 56% of the U.S. banking sector's total. A decade ago, the top four's $2 trillion of assets accounted for 38% of the total. In the past 30 years, large banks have facilitated dramatic increases in leverage across the economy and stretched their own balance sheets. Financial-sector debt reached 118% of gross domestic product at the end of 2008, up from 18% in 1978."

Tempting as it is to blame George W Bush for this (and why not?), we have to acknowledge (1) Obama bought into this by making Geithner Treasury Secretary and re-appointing Bernanke, (2) Obama got more Wall Street donations than McCain did, (3) most of the proposed stuff puts more regulations and regulators around the issue, and we've all seen how well the SEC protected us from Bernie Madoff (and the many other Ponzi schemes that have been found). It smacks of posturing and window dressing.

Eavis continues: "Confronted by the banks' enormous size and their role in the crisis, lawmakers could have demanded smaller, simpler institutions. These would be much easier to regulate, and most important, they could fail without too much economic impact."

It's hard not to be cynical here, and I'm not going to try very hard.  Bunches of community banks will donate a bit to the local congressman and maybe a Banker's group like the ABA.  GigantoBanks will shower Congressional incumbents with donations (which make sense as a business investment). In addition,  government financial institutions (Fed, Treasury) will tend to be run by alumni of the GigantoBanks, meaning they are culturally attuned to thinking "What's good for Goldman Sachs is good for the country", just as Charles Wilson had trouble imagining that GM's needs and the country's needs were different when Eisenhower appointed him Secretary of Defense.