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J.P Morgan suffered a two-billion-dollar loss this week on an over-extended financial position. There was some dramatic irony in this, because their man, Jamie Dimon, had just argued on Capitol Hill that Wall Street should be free from any more planned regulations. This was ballsy enough, since the last catastrophic financial meltdown occurred only a few years ago, but then to suffer another implosion right after his big spiel, well, these people are another breed, and perhaps 'psychopathic' is not too strong a term.
In the discussion and debate that has been taking place, I am finding myself being persuaded by the call to break up the big banks, rather than try to further regulate them. The problem with this answer, though, is that it probably really is Utopian in its own right.
_ _ _
A final option is to concede that there is no foolproof way to regulate banks. Modern finance is complex and fast-paced. Try as we might, it is impossible to outlaw errors in judgment, overconfidence, misguided innovation, or unforeseen events.
I believe that our best hope lies somewhere other than making our largest financial institutions impossible to break. Instead, I think we need to make our financial system easy to fix. It was with that idea in mind that, writing in National Review two years ago, I proposed breaking up the big banks. J. P. Morgan’s announced loss serves to reinforce my view.
My biggest objection to large financial institutions continues to be what I see as the inevitable collusion of politics and economics that results. When large banks have resources, politicians will be tempted to treat them as piñatas, taking whacks at them in order to extract money to distribute to constituents (see the recent “foreclosure settlement,” or the pressure being placed on Freddie Mac and Fannie Mae to write down principal on loans). When large banks get in trouble, politicians will be tempted to bail them out.
In my view, we do not need the thousands of pages of regulation represented by Dodd-Frank. We do not need to ask regulators to divine the difference between speculation and “real banking,” as envisioned by the Volcker Rule. Instead, we should seek limits on the asset size of individual banks. J. P. Morgan today is about ten times as large as any bank ought to be. The general public should not have to lose sleep worrying about this or any other individual bank’s fate, and with smaller banks, they wouldn’t have to.
-- Arnold Kling at The National Review
In the discussion and debate that has been taking place, I am finding myself being persuaded by the call to break up the big banks, rather than try to further regulate them. The problem with this answer, though, is that it probably really is Utopian in its own right.
_ _ _
A final option is to concede that there is no foolproof way to regulate banks. Modern finance is complex and fast-paced. Try as we might, it is impossible to outlaw errors in judgment, overconfidence, misguided innovation, or unforeseen events.
I believe that our best hope lies somewhere other than making our largest financial institutions impossible to break. Instead, I think we need to make our financial system easy to fix. It was with that idea in mind that, writing in National Review two years ago, I proposed breaking up the big banks. J. P. Morgan’s announced loss serves to reinforce my view.
My biggest objection to large financial institutions continues to be what I see as the inevitable collusion of politics and economics that results. When large banks have resources, politicians will be tempted to treat them as piñatas, taking whacks at them in order to extract money to distribute to constituents (see the recent “foreclosure settlement,” or the pressure being placed on Freddie Mac and Fannie Mae to write down principal on loans). When large banks get in trouble, politicians will be tempted to bail them out.
In my view, we do not need the thousands of pages of regulation represented by Dodd-Frank. We do not need to ask regulators to divine the difference between speculation and “real banking,” as envisioned by the Volcker Rule. Instead, we should seek limits on the asset size of individual banks. J. P. Morgan today is about ten times as large as any bank ought to be. The general public should not have to lose sleep worrying about this or any other individual bank’s fate, and with smaller banks, they wouldn’t have to.
-- Arnold Kling at The National Review
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Date: 2012-05-19 01:33 am (UTC)From:The sad reality is that little banks died and were swallowed by bigger, more ruthless banks.
Banks can't really have a nice, mutually beneficial relationship with their clients for long, unless they're grinding some other client in some amazing way (as in the days of 30-year mortgages). When all you're selling is money, one side of the deal is of necessity getting taken.
In a competitive environment, small banks will sooner or later try to be friendly banks again, and win customers. They will run out of capital as the S&L's did in the 1980's, and the natural process of evolution will reward large, ruthless Mega-Mega-Big Capital, again.
Maybe it's time to abandon the idea that private moneylenders are key to the economy, and build a state-managed egalitarian theory of finance, using progressive taxes and general subsidies. Of course, even if I spend the rest of my life trying to build such a thing, I might never see it. But in time, perhaps.