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Too Big to Save

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Occasionally there is an opinion piece in the papers so clear in its analysis of a problem, so convincing in its argumentation, and so authoritative in its judgment that, on finishing it, a reader is tempted to just stand up and cheer.


That's what I felt like after reading "How to Shrink the 'Too-Big-to-Fail' Banks" by Richard W. Fisher, the president of the Federal Reserve Bank of Dallas, and Harvey Rosenblum, its research director, in the Wall Street Journal the other day -- Monday, March 11, 2013.

Both of those bankers/thinkers seem well aware that there is no argument more powerful than a fact. And as old John Adams pointed out long ago, facts are stubborn things. They cannot be wished away. Here are a couple of facts Messrs. Fisher and Rosenblum point out at the very beginning of their case for downsizing the country's biggest banks:

Fact No. 1 -- A dozen mega-banks control almost 70 percent of the assets in the American banking industry.

Fact No. 2 -- These huge banks constitute only 0.2 percent of the country's banks, but because they've been deemed Too Big to Fail by the federal government, they're not subject to the same rules and regulations as the other 99.8 percent.

So much for Equal Justice Under Law, the admirable sentiment engraved atop the columns of the classical Supreme Court building in Washington -- if only for ornamental purposes.

These two facts add up to one inescapable conclusion: These favored banks, complete with their far-flung subdivisions, auxiliaries, and wholly owned subsidiaries and assorted tentacles, claws and appendages spreading out in all directions national and international, have been immunized against the usual risks in a free market -- like going broke.


The big boys' debts get an implicit government guarantee. Result: The whole American banking industry becomes dominated by a handful of banks-cum-hedge funds that operate without meaningful regulation -- and stifle competition.

The effect is to deny this critical sector of the American economy the benefits of what Joseph Schumpeter dubbed creative destruction -- the "perennial gale ... that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." Schumpeter called creative destruction the essential fact about capitalism.

Without the risk of failure, there is no responsibility to avoid it -- and no reform or rejuvenation after it. But just a government-authorized oligopoly sheltered from the workings of a free economy. And dragging it down. We may not realize it when we ourselves experience it, but failure is our friend and teacher. And without it, we might never learn.

When banks get "too big to fail," they can intimidate not just their competitors but the law. Or as the current attorney general, Eric Holder, testified earlier this year, "It is difficult to prosecute them (because) if we do bring a criminal charge, it will have a negative impact on the national economy."

That's how this unholy alliance between big banks and big government operates -- to no one's long-term benefit, not even that of the favored banks themselves. Unchallenged, they grow fat and lazy and careless, especially with other people's money.


It hasn't been too long -- just last year -- that the country's largest bank, JP Morgan Chase, finally admitted that it had lost track of $2 billion, or maybe $3 billion, through a complex form of speculation called credit default swaps or derivatives. Whatever the proper name, they promised protection and delivered disaster. It seems a bank too big to fail may also be too big to manage. This is what comes of letting these banking empires grow beyond any control, even their own.

There was a time (1933-1999) when the law clearly separated investment banking with all its risks from the ordinary, regulated commercial kind. That wholesome separation was mandated by the late and only now lamented Glass-Steagall Act, which was enacted in the wake of the Great Depression, when it had become all too clear what allowing banks to play with their depositors' money could lead to.

But memories are short and the hubris of man boundless. That salutary wall between commercial and investment banking was dismantled by a bipartisan team led by those financial masterminds, Bill Clinton and Phil Gramm. The politicians and the banking lobby knew better than to heed mere history and its lessons. Or thought they did.

Messrs. Fisher and Rosenblum have a better idea: They would once again subject all banks to the same, uniform regulations, not give the biggest a free pass -- to their and the economy's ruination. "Had this plan been in place a decade ago," they write, "it would have altered the insidious behaviors that contributed to the crisis (of 2008-09), avoiding the bailouts and their aftermath, the cost of which our nation's citizens will bear for years to come."


That cost wasn't just material. Favoring these too-big-to-fail banks has also "perpetuated a sense that powerful banking mandarins operate above the law and prosper at the expense of the thrifty and hardworking citizenry." A sense all too well documented by the daily news.

Richard Fisher and Harvey Rosenblum have a better idea: Let these too-big-to-fail banks fail. That way, the "downsized, formerly too-big-to-fail banks would be just like the other 99.8 percent, failing with finality when necessary -- closed on a Friday and re-opened on Monday under new ownership; and management in the customary process managed by the Federal Deposit Insurance Corporation."

Call it a happy ending -- quick, clean, fair and efficient. When it comes to restoring competition and revitalizing the capitalist system as a whole, nothing succeeds like failure.

These two bankers and thinkers out here in the middle of this country and republic would prefer to encourage competition by breaking up these financial empires. And stop insuring their misadventures with our tax money. Cut them down to size and let a multitude of new, smaller banks rise in their place. To quote the signature phrase of another economist of the last century, E.F. Schumacher, "small is beautiful."

It's time to revive anti-trust law in general if we are to rejuvenate this overgrown economy and its tangled thicket of "regulation" that really isn't. See Dodd-Frank, a supposed reform that's turning out to be as ineffectual as it is complex.


Where, oh where, are the trustbusters of the past? Teddy Roosevelt, William Howard Taft, the New Deal's Thurman Arnold, Robert Bicks of the Eisenhower Era ... all gone with Glass-Steagall. It's time to revive that vanished breed. Yes, let us return to the past. That would be real progress.

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