Tuesday, December 08, 2009

Thoughts on "too big to fail"

Economist and blogger Rebecca Wilder has some thoughts on "too big to fail" banks.


  1. Everyone knows banks were "too big to fail" when society had to rescue them as the least of two evils.

    After the meltdown, many of those players merged. They're even bigger.

    And, the problem isn't just that they account for 2% of GDP. The top 5 banks today have returned to record levels of derivative use, having a combined notional value of 14 times GDP. See this article for details.

    The Fed Reserve was passed to prevent a few men running the largest banks from controlling the country's money supply. Today, that very problem is occurring. A five banks have leveraged 14 times GDP and, if their "bets" go wrong, it will the society who has to print dollars to recover from the mess.

    Note: For those who don't believe that was the original purpose of the Fed Reserve, see President Woodrow Wilson's comments (circa 1913-1914), reprinted in eprinted in Senate Doc. 23, 76th Congress, 1st Session, 1939, page 100.

    The problem he describes is exactly the problem we have today when a handful of the largest banks caused the money supply to more than quadruple in the span of months, and they've returned back to their tricks like nothing happened (as the rest of the country is still trying to recover).


  2. For centuries there has been big money to be made by international bankers in the
    financing of governments and kings. Such operators are faced, however, with certain
    thorny problems. We know that smaller banking operations protect themselves by taking
    collateral, but what kind of collateral can you get from a government or a king? What if
    the banker comes to collect and the king says, "Off with his head"? The process through
    which one collects a debt from a government or a monarch is not a subject taught in the
    business schools of our universities, and most of us-never having been in the business of
    financing kings-have not given the problem much thought But there is a king-financing
    business and to those who can ensure collection it is lucrative indeed.

    Economics Professor Stuart Crane notes that there are two means used to collateralize
    loans to governments and kings. Whenever a business firm borrows big money its
    creditor obtains a voice in management to protect his investment. Like a business, no
    government can borrow big money unless willing to surrender to the creditor some
    measure of sovereignty as collateral. Certainly international bankers who have loaned
    hundred' of billions of dollars to governments around the work command considerable
    influence in the policies of such governments.

    But the ultimate advantage the creditor has over the king or president is that if the ruler
    gets out of line the banker can finance his enemy or rival. Therefore, if you want to stay
    in the lucrative king-financing business, it is wise to have an enemy or rival waiting in
    the wings to unseat every king or president to whom you lend. If the king doesn't have an
    enemy, you must create one.