Simon Johnson: TBTF Lives On



EDITOR’S COMMENT: The fact that our entire economy, way of life, and governmental structure is at risk and will remain so indefinitely — as long as we let it — puts everyone across the political spectrum at the horns of a dilemma. If you are on the right side of the spectrum you think government is already too big and is meddling in the “free” markets (which as we have shown is anything but free in actuality). But those on the right hang to the ideology that socialism is bad and they broaden the definition from merely an economic system in which democratic principles can and do flourish in dozens of countries, to a way of government, something like the USSR.

Socialism is not a form of dictatorship. It is a form of paying for things. Your fire department is paid for with public dollars — which is socialism. That doesn’t mean that our way of life has been destroyed. On the contrary, preserving your home from the danger of burning down is a good thing for you and society. ALL societies have components of socialism and capitalism. Politics comes in when we start deciding where the balance point is, and we never completely agree because conditions change constantly. THAT is why 1sst amendment freedom of speech and freedom of assembly is so important. No one person or party has the answer. The answer, for the moment, is constantly being hammered out in compromises that drive the ideologues on both sides crazy because things didn’t turn out “their way.” Good thing for them. Because if they got their way completely, all of society would fall apart.

The translation of TBTF (Too Big To Fail) is TBTR (Too Big To Regulate), as in impossible because they cross state, county and even sovereign boundaries. If you put a person in front of a pile of money that he or she knows belongs to someone else, but you also give them the information that if they steal it they will get away with it, I’m afraid human nature is not evolved enough to avoid the consequences — they’ll take the money and run.

So we need someone to tell them it is wrong and that there is someone who will stop them or catch them and throw them in jail. That is where government comes in. The right side of the spectrum wants little or no government but they don’t want people helping themselves to the money and property of other people. Yet that is exactly what the mega banks are doing. So we need a referee and a policeman and a jail to stop it. The problem is that the “person” is a legal fiction and too large to stop, catch or punish.

So we need government to stop this behavior and if that means dismantling a private corporate infrastructure, Like AT&T, they need to do it. Or we need government to come up with the money when the owner comes back, knowing they own the money, and finds that not only isn’t the money there, they have no remedy to get it back. So the government must pay for those losses (bailout) which is socialism. Uh-oh. Seems like we need government  either way, doesn’t it? But the banks have solved that problem by buying the government with fake money that they issued in amounts more than 1000% of real government fiat currency. Either they are bigger than government or they are just acting like it. And THAT is the question.

If you go all the way to the other side of the political spectrum you find the left. All banks are bad. Where are you going to safely keep your money? Derivatives are bad. How are you going to improve liquidity in a fast growing demographic world that needs capital by the boatloads? Bank profits are excessive. Well yes they are when they drain the economy of everything it has, but do you really expect people whose only business is to make money creating the movement of money to do anything but make as much money as they can? This is pretty heady stuff. If you want really smart people coming up with innovative solutions to spread risk beyond the vehicle of the old joint stock company, they are going to Wall Street or somewhere else where they will be paid for their brains.

In plain language the economy needs consumers, needs banks and needs production of goods and services performed here so that payrolls rise and our standard of living improves instead of twirling down into the sewer. Eradication of profit doesn’t work. Marx and the Soviet Union and even China have proven that beyond any reasonable doubt. But having a referee in the middle making sure one team doesn’t just take out a weapon and kill the other team is the job of government. If the entity is too big to regulate, all available steps must be taken to either increase our ability to regulate or decrease the size of the entity that threatens to control our lives — or both — and it must be real this time, not window dressing. It really is that simple.


Tim Geithner: Never Again, Until The Next Time

with 27 comments

By Simon Johnson

In a column now running on Bloomberg, I review the new Inspector General report on what exactly happened during the “Citi Bailout Weekend” of late November 2008.

The big question lurking in the background is how acutely we face a problem of Too Big To Fail (TBTF) today, i.e., the perception in the credit markets that very big banks will be supported in a crisis, therefore enabling these banks to borrow more cheaply during a boom – and thus enabling them to become larger and increasing their debt relative to equity (leverage).

According to the report, Treasury Secretary Tim Geithner now completely backs away from claims that the Dodd-Frank reform legislation ended TBTF.

Standard and Poor’s appears to be on the right track with their latest revised Bank Ratings methodology – presuming that “potential government support” is, going forward, always available to megabanks.  This is exactly the conclusion of 13 Bankers.  We should worry greatly about the implications.

To read the full column, click here, or cut and paste this address:

2 Responses

  1. Also, that horrible point about the TBTF financial institutions being so big that their (supposed assets) exceed the GNP of a country and then the whole country goes down the tubes when the TBTF bank goes down. The banks must be broken up and made smaller. It is safer for all of us.

  2. As Sewell Chan points out — too big to fail is not just about assets — it is about relationships.

    It is the relationships that are “too big too fail.”

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