Big banks are more dangerous than you think

I recently returned from visiting Iceland and Ireland at the request of economists in those nations who wished to discuss the national banking crises. Their situations show what happens when large banks are “control frauds” that become so big relative to their economies that they pose an existential threat to the nation.

Mr. Hoenig has not made the full case against these large banks because he did not discuss the implications of Lord Acton’s warning that absolute power corrupts absolutely. Iceland and Ireland demonstrate that the executives of these banks have such absolute power that they can dictate national policies and turn the regulators into cheerleaders. “Private market discipline” also becomes an oxymoron: creditors and shareholders fund the growth of the bankrupt banks…

Our largest banks in the U.S. can have trillions of dollars in liabilities. A single fraudulent bank would be large enough to hyper-inflate a bubble, cause “echo” epidemics of control fraud (e.g., appraisal fraud), lead to hundreds of billions of dollars in losses and result in a cascade of failures among other financial firms. It is inevitable that one of these banks would use its political power to fend off closure, so its collapse would also produce political scandals.

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