One thing on which there seems to be universal agreement is the need for redesigning our banking laws to adapt to the realities of the 21st century. We have had only minor changes, some of them harmful, since enactment of the Depression-era laws that still govern a large part of our system. Henry Paulson, Secretary of the Treasury under George W. Bush, was working on a modernization plan when the market cratered at the end of Bush’s second term. Now the question is what should we do?
Paul Volcker, former Chairman of the Federal Reserve, has been appointed as the point man for the Obama Administration. The appointment of Mr. Volcker as Chairman of the Fed may be Jimmy Carter’s single greatest accomplishment, even though his most significant work came during the first term of Ronald Reagan. His success at helping to reverse the economic problems that Reagan inherited has established him as a near-legendary figure.
Mr. Volcker expressed his thoughts about what needs to be done in a lengthy article published January 31st in the New York Times. While he proposed many fine ideas to modernize our policies for today’s financial world, even the brilliant Mr. Volcker unfortunately falls way short in defining the underlying problem and how to resolve it.
The first area of concern is the “too big to fail” issue. Part of the problem that Secretary Paulson faced was whether to allow a company to fail, and/or whether that failure would cause an avalanche crushing the rest of the banking system. Mr. Paulson admits he was flying blind as he had no prior experiences to reference. Yet the fact that he and his successor, Timothy Geithner, made enough correct decisions to place us in a stable situation was part luck and lot based on their lifelong careers.
Unfortunately, as part of this realignment they have consolidated the banking industry even more. Four banks, Bank of America, Wells Fargo, Citibank and Chase, were asked to absorb several failing enterprises and did so to salvage the day. They now have well over 50% of the bank deposits in the country and they are truly too big to fail. In addition, they were asked to absorb failing investment firms like Merrill Lynch and Wachovia.