Green Room

Break up the Banks!

posted at 7:54 pm on June 4, 2012 by

James Pethokoukis is right. It’s time to break up the big banks. Now, I’m not an Occupier. While I do live with my parents (rent is cheaper), I contend that my hygiene is much better than your average occupier and I’m not prone to raping people. However, there are still good reasons to break up the big banks.

Many libertarians and market purists would contend that there is no such thing as “too big too fail” and that it is no business of Washington to tell a business how big a bank should get if it reaches that size through legal means. Normally, I would agree with them. However, the financial sector is a tricky beast. Psychology plays much more of a role than normal in the market. That’s why there are such things as panics. Things can spiral out of control very quickly and even good actors can be taken down by irrational fears. For something so subject to the fears of its least rational members, the fact that the financial sector is the beating heart of the economy makes this situation all the more troubling. This fact is not lost on our elected officials, hence the bailouts (I’m sure the motives for bailouts are less than pure, but even if one didn’t take a cent from the banks, when confronted with a financial collapse, a lot of people would be hard pressed to say no).

The Pethokoukis piece describes how this “break-up” process should occur and I encourage you to give it a look. However, I’d also like to look at this from a more political angle. What would happen if Romney called for just this remedy? Would he take a hit with Wall Street donors? Probably. Would it be a smart move? I think so. What the Obama Campaign tried (and failed miserably) to do with their Bain attacks is to portray Governor Romney as some kind of vulture capitalist that liked to make money screwing over the working man. Romney did a good job of deflecting those attacks, but I believe that a good offense beats a great defense.

If he announces (at the Convention wouldn’t be bad, I’m only afraid Obama would beat him to the punch) that he intends to break up the big banks, he would do a lot to dispel the notion that he is a tool of Wall Street. It’s an issue that would put him to the “left” so to speak of Obama. A lot of liberals, who would never vote for Romney, would further be disgusted with Obama if he fought against this and maybe sit out for November. A lot of tea-party types would be for it because they’re sick of bailouts and too-big to fail. If Obama agreed with Romney, it wouldn’t change the fact that the economy is in rough shape and that Obama had a full term to push for this, but he’s failed to deliver. Either way, Romney comes out on top.

It also allows Romney, if he were to be elected, to push through a lot of deregulation with the chance at bipartisan support. Sun-Tzu said, “Build your opponent a golden bridge to retreat across”. I agree. A flat out repeal of Dodd-Frank and Sarbanes-Oxley would be very difficult, even with full control of Congress. However, if you give your opponent a way to declare victory, then you can accomplish your objectives. Tack on a repeal of Dodd-Frank and/or Sarbanes-Oxley to a bank break-up bill and you can get some moderate (for Democrats at least) to jump on board because you let them go home and say, “See what I did, I stuck it to those evil Wall Street fat cats!”.

Pushing for breaking up the big banks, in my humble opinion, is both good policy and good politics. I believe that Governor Romney would be wise to push for this and make this a central plank of his economic plan for the campaign.

 

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My friend, you couldn’t be more wrong if you did have hygene problems. First, how did those banks, especially Bank of America get so big? They merged with and took over other banks, smaller ones, that were too small to take any hits what so ever. In other words, those smaller community banks that are so in vogue right now. When one of them makes a big loan, they can’t afford for it to go bad, or they go under.

Wachovia for example, bought a ton of those toxic mortgages that were supposed to be just as secure as putting your money in Fort Knox. Rated that way by Fannie Mae and Freddie Mac. Try finding a Wachoiva branch now. They couldn’t absorb the losses, and were sold to Wells Fargo, a bigger bank, who could absorb the losses.

We created the mega banks, because we had to have someone stop the little four and five branch banks from going belly up and wiping out the community savings. So now you want to break apart the mega banks.

OK, so what do you do? Break them up like AT&T? Turn Bank of America into many smaller regional banks? Those same smaller regional banks that are going the way of the Do Do because they are too small to absorb any losses?

How long before we are again debating breaking up the big banks that are too big to fail?

Tell you what, watch the Frontline episodes about Bank of America, and see what the Feds did to it. The Feds demanded that Bank of America get larger, or else the Feds would oust the CEO and have the bank do it anyway.

PFUI.

Snake307 on June 4, 2012 at 8:37 PM

Reinstate Glass-Steagall and re-separate banking from investment. That would prevent a lot of risks that you mention.

dominigan on June 4, 2012 at 8:49 PM

Snake307 on June 4, 2012 at 8:37 PM

While I agree with much of what you say, Snake307, it’s important to point out that the smaller banks weren’t failing because there’s some natural principle that small banks can’t make it.

Regulatory policies — in every industry — are a big part of why smaller businesses become increasingly non-viable today. Banking is just one industry in which that’s the case.

Over the history of modern banking, many banks have failed because of poor management, but in the US, over the past 30 years, many have also failed because smaller banks can’t adjust when the regulatory climate changes, and the entire economy is affected.

If we want smaller banks, we have to have less regulation. We could get rid of nonsensical regulation on the banking industry, such as regulation that requires banks to consider an applicant’s race in processing a loan.

But that wouldn’t be enough; banks are extremely sensitive to everything that happens in the economy as a whole, and are affected by all regulation on everyone and everything. Subsidize trillions in high-risk mortgage loans, and you affect the viability of banks. Indeed, promote an unsustainable culture of borrowing for consumption, and you affect the viability of banks. Prevent oil and gas operations, and you affect the viability of regional banks. Raise the cost of health care — take over the industry so that you can force increased contributions from the people — and you will effectively suppress investment borrowing and business formation, and that means you will affect the viability of banks.

We’ve been slapping bandaids on our killer regulatory environment for at least the last 30 years, and people have become so inured to the regulation that they don’t realize it’s one of our biggest problems. If the regulatory environment were lightened significantly, everything else, including the viability of smaller banks, would change for the better.

J.E. Dyer on June 4, 2012 at 8:56 PM

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Allahpundit on June 5, 2012 at 1:33 AM

Reinstate Glass-Steagall and re-separate banking from investment. That would prevent a lot of risks that you mention.

dominigan on June 4, 2012 at 8:49 PM

+1000

“Ask not what your TEA Party can do for you…” ~ DeepWheat

DeepWheat on June 4, 2012 at 9:37 PM