10.17.2012 in Economy, Featured, Federal Reserve by Bill Wilson 4

Time to break up the banks?

Break Up the Banks

Photo Credit: sharonkubo/Flickr

By Bill Wilson — An excellent piece by syndicated columnist George Will on Oct. 12 urges Mitt Romney, should he defeat Barack Obama at the ballot on Nov. 6, to tap Dallas Federal Reserve Chairman Richard Fisher for Treasury Secretary. Why? Fisher is calling for an end to “too big to fail” financial institutions.

Particularly, Fisher thinks it’s time to break up the nation’s largest banks, saying that “too-big-to-fail banks are too-dangerous-to-permit.” He notes that half of all the nation’s commercial bank assets — consisting of loans, securities, etc. — are concentrated in just five financial institutions, comprising more than 58 percent of the entire Gross Domestic Product (GDP) of the U.S.

In his paper Fisher writes, “sustaining too-big-to-fail-ism and maintaining the cocoon of protection of [systemically important financial institutions] SIFIs is counterproductive, expensive and socially questionable.”

The solution? “[A]n international accord that would break up these institutions into more manageable size” should be adopted. Not a bad idea. Once financial institutions boast balance sheets comparable in size to the entire economy, that might be an indication they are getting too big.

But the issue may even be wider than that. With the nation’s financial system as a whole issuing credit nationwide totaling $54 trillion — representing 353 percent of the $15.5 trillion economy — it is quite clear there is even more debt being issued than there is money to repay it all.

All of which is made possible by the simple fact that banks are allowed by law to issue far more in debt than they ever hold in capital. The result? If defaults on those loans exceed what has been invested by shareholders, the bank is broke.

Fisher addresses the issue of capital requirements, noting that they have been used in some form in the U.S. going all the way back National Bank Act of 1864.

He might have added that they have never really proven adequate when financial crises have hit. They have helped facilitate economic booms and then when the bust happens, the public often bears the consequences.

So while Fisher supports higher capital requirements, he is also okay with letting banks go bust. The problem for him is the bailouts that follow the bust for too-big-to-fail institutions. If their size was limited by law, and the consequence was always shareholders lose their money if the bank folds, in principle banks would be more careful with whom they lend to.

But this would have to be coupled with the lifting of federal lending mandates that contributed to ill-conceived mortgage loans to individuals who could not afford to repay in the 1990s and 2000s. Banks would have to be allowed to set their own credit standards and to make their own risk assessments — and then bear the consequences of failure.

The law of the jungle would prevent or at least lessen financial crises. And when they did hit, bad actors in the system would be removed. In short, no more bailouts.

Hard to argue with that. What is significant is an established conservative pundit like George Will taking up Fisher’s mantle to break up the banks. Could this be indicative of where Mitt Romney is on this issue?

It may be too early to tell, but there may yet be hope for the Republican Party that tarnished its reputation with the American people by supporting bailouts of banks in 2008.

Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.

  • pduffy

    What’s too big to fail? That would be the ‘fed’ itself. The ‘fed’ (which is just the shadow bank of congress), has a total monopoly on the American money supply, which should be gold and silver coin, not worthless notes printed by the U.S. Treasury. The only thing holding up this house of cards is the force of government, and that would be the ‘fed’ itself, which was created by an act of congress. Don’t be fooled folks, the U.S. Treasury prints all the money, and they make the deposits into the ‘fed’ with money that is printed by the ‘too big to fail’ United States Government.

  • jwatersphd

    So, Bill, now you’re for drastic federal intervention? You’re making sense here, but it’s going to take a powerful federal government to pull this off. So why are you opposed to Obamacare as a drastic federal intervention? Oh, and where did states’ rights go in calling for selling insurance across state lines? Gee — some worthwhile things seem to require things you usually demonize. Keep your mind open.

  • WhiteFalcon

    Fisher is exactly correct. The biggest banks should be borken up and Fannie Mae and Freddie Mac should be gone. Banks should do banking alone and not insurance or investments or any of the other side businesses that they do. The same holds true for Government. We should get the Government out of private enterprise. Banks like Citi Corp, JP Morgan-Chase, Wells Fargo, and others should be broken into about five different pieces in some manner, and their illegal activities should be stopped. I have read in several places, for instance, that Chase has options on far more silver that all the silver in the world. That should be ended. I could rant on and on, but I won’t. The point is that several huge banks should be broken up and a few should just be gone.

  • Public Citizen

    Unfortunately too many of the current members of Congress are beholden to these TBTF/TDTE institutions.

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