Friday, October 14, 2011

Banking Reform

Via Reihan, FLG learns Matt Taibbi has some demand recommendations for the OWS crowd:
1. Break up the monopolies. The so-called “Too Big to Fail” financial companies – now sometimes called by the more accurate term “Systemically Dangerous Institutions” – are a direct threat to national security. They are above the law and above market consequence, making them more dangerous and unaccountable than a thousand mafias combined. There are about 20 such firms in America, and they need to be dismantled; a good start would be to repeal the Gramm-Leach-Bliley Act and mandate the separation of insurance companies, investment banks and commercial banks.

FLG is still waiting for a compelling explanation how and why reinstating Glass-Steagall, which is what Taibbi is calling for here, is going to work. The logic seems to be that banks and banking was simple and safe when Glass-Steagall was around, so if we reinstate it, then it will be simple and safe again.

FLG thinks if one is really worried about Too Big To Fail, then the problem lies not with the repeal of Glass-Steagall by GLBA, but the IBBEA five years earlier. What the heck is IBBEA? The Interstate Banking and Branch Efficiency Act.

While there was the Banking Holding Company Act back in the 50s and there were regional compacts for interstate banking going back to 1982, the IBBEAs passage in 1994 opened the floodgates to banks to operate across state lines. That, not GLBA as many would have you believe, is when massive banks really began to emerge.

So, if we are going to break up banks, then let's do it along state lines. Now, FLG understands that this seems less rational than breaking them up by function. Better to separate the institutions by whether their business is risky or not than anachronistic political lines with no real economic or financial meaning.

Well, FLG demurs. The thing that these Glass-Steagall proponents miss is that we can't turn back the clock on banking by turning back the legal regime. Financial innovation, caused primarily by information technology, has blurred the lines between what used to be separate functions of financial institutions. Finance is ultimately about somebody paying some money to somebody else now and getting paid back at some point in the future. That's true whether you are talking about bank deposits, mortgages, or insurance. Well, over the previous 30 years or so, computers made financial instruments, broadly speaking derivatives, that blur these old lines. We can't and nor do we really want to disinvent these things. So, rather than trying to enforce the old lines of finance in a world in which they make less and less sense by having regulators determine what a reasonable versus unreasonable purchase or sale of derivatives for that line of business, it would be easier just to break up the banks along perfectly clear geographic lines.


The Ancient said...

1) Continental Illinois National Bank and Trust Company, May 1984. At the time, it seemed enormous. "Too Big to Fail."

2) What do you think would happen to the price and availability of credit if banks were geographically limited, as you suggest?

3) The problem isn't size, or even the integration of functions. It's leverage. Every banker with a conscience -- and there are some -- knows that.

(If we had serious controls on leverage, could the banks still make enough to maintain -- or expand -- the current level of executive salaries and bonuses? Probably not. So let them go find other work, if it's not enough to pay their bills.)

FLG said...

The Ancient:

Shit. I must not have put the tongue sufficiently in cheek. Breaking them up by state is preposterous. But less proposterous than trying to reinstate Glass-Steagall.

Re: #3)
Here are some of my old post titles:
Housing And Leverage
Capital And Leverage
Leverage, Still The Root Problem
It's All About Leverage

The Ancient said...

Perhaps it's my fault. Some days I have the attention span of a gnat.

FLG said...

The Ancient:

If there's confusion, then the fault is mine.

Btw, Halloween is coming soon. You preparing to leave town?

The Ancient said...

Halloween is coming soon. You preparing to leave town?

It's now a time-honored tradition.

(That, and greasing the front steps.)

The Ancient said...

I see Taibbi is neck-deep with the OWS movement:

(Very disappointing.)

The Ancient said...

For Taibbi:

Giant Vampire Squid Endorses Loosey Goosey Fed

FLG said...

Not surprising about taibbi

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