The Only Way to Prevent Another Bailout

[abelenkpe]

The Only Way to Prevent Another Bailout of Wall Street is to Cap the Size of Wall Street’s Big Banks

http://robertreich.org/post/525962021/the-only-way-to-prevent-another-bailout-of-wall-street


Friday, April 16, 2010

The best way for Senate Dems and the White House to respond to the Republican charge that the Dem plan for financial reform doesn’t go far enough to prevent another bailout is to call their bluff — and simultaneously do what’s necessary to avoid another bailout: Cap the size of big banks, as the UK is close to doing for its big banks.

The so-called “resolution” mechanism the Dems are pushing to wind down any big bank that gets into trouble is a step in the right direction. But it won’t work if two or more giant banks are endangered at the same time — which is likely to be the case when the next crisis occurs because every big bank uses whatever profitable financial ploys every other bank uses (as they did in the runup to the crash of 2008).

Furthermore, as I’ve noted before, as long as the big banks are allowed to be huge and become even bigger, their political clout in Washington will remain huge and become even bigger. And as long as they have this kind of clout, they’ll wangle a bailout from Washington the next time their bets get them into trouble regardless of any “resolution” authority.

So the Dem bill must cut the big banks down to size. The limit should be $100 billion in assets.

Banks complain that their global competitiveness will suffer if they’re held to this size. Baloney.

(more good stuff at link)

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[jtuck004]

1. Maybe size isn't that important...maybe it's quality...

Not to argue with your point, but Roger Lowenstein was on NPR this morning, and made the point that it wasn't the size of the banks, it was the leverage.

If we had 10 thousand banks all just as heavily leveraged the outcome would have been the same when everything came apart. It was the borrowing, and the loose standards, and the lack of oversight to hold this in check. And if we just cut it down, but don't fundamentally change the way they are able to leverage assets, all we do is increase the overhead.


Or maybe we do both.

[abelenkpe]

2. I see your point

and agree, we need to limit leverage and provide more oversight. Breaking up the banks would be good too, for local economies everywhere. More small local banks would employ more people, and they would be able to provide better more personalized service for their customers.

[jtuck004]

3. I would go for that..

But what are we gonna tell the retirees that have their stock in an account and were counting on the income from the bigger bank to add onto their insufficient social security? And who is going to provide the captial for the bank if people won't buy stock cause it's too small an issue?

Not arguing, but this is the system we have today. To break it up into less "efficient" (that is, destructive to a large number of people for the benefit of a few :) ) we have some structural problems and real cultural obstacles to overcome.

But I still think this would be something worth striving for.

[notesdev]

4. China has a better solution to this one

They execute the people responsible. Puts a stop to this kind of nonsense right quick, it does.