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"They
are too big to fail" was the reason given for using trillions of dollars
in money and guarantees to 'bail out' several large US banks during
2008-2009. Their failure, it was argued, would all but bring the entire
economy to a standstill; such were the size and scope of their operations.
Providing the banks whatever financial support they needed to remain in
business was therefore touted as serving the "public interest".
However, the "too big to fail" argument was a giant, multi-faceted
lie.
One
part of the lie was that rescuing the banks would ensure the continued flow of
credit to private individuals and businesses. It is now blatantly obvious
that this was not true because bank lending has been in decline ever since
the bailouts. Although, perhaps we are being unkind and it should be put down
as a basic misunderstanding stemming from the popularity of fallacious
Keynesian economic theories.
The
crux of the lending issue was/is that the pool of real savings became
severely depleted during the inflation-fueled boom of 2003-2007. It should
therefore be no surprise that the private economy has since been desperately
trying to replenish its savings, and, as a consequence, that there has been
less desire and less ability to create new debt. Once the real issue is
understood it becomes clear that the banks were never likely to quickly
return to their old lending habits and that it would be bad for the economy
if they did.
A
second part of the lie was that depositors were at risk, when it was actually
just the bond- and equity-holders of the banks that were at risk. The
bailouts were essentially carried out to prevent the owners of bank bonds
from taking losses on their bad investments under a policy that could be
aptly named "no bank-bondholder left behind".
A
third part of the lie was more a misdirection than a lie, because the ultimate
source of the funds for the bailouts was deliberately kept vague. There was
always the implication that the government was funding the bailouts, but the
government doesn't have or generate any real savings and can therefore never
fund anything. The harsh reality is that the bailouts involved a massive
transfer of wealth from the rest of the economy to the banks' bondholders in
the first instance, and later to the banks' managers and traders.
Understanding
how government bailouts of failed businesses are funded reveals the
overarching lie that a bank or any other business could ever be "too big
to fail". The truth is that one business or economic sector can only
ever be given artificial support at the expense of other parts of the
economy, so the bigger the business the LESS sense it will make, from an
economy-wide perspective, to bail it out. Moreover, when a business fails it
doesn't just disappear in a puff of smoke; rather, the parts of the business
that are economically viable get sold off and resources get freed-up to be
used elsewhere. In the cases of the big banks, the underlying banking
businesses were healthy and would have continued to operate under different
ownership if the banks had been permitted to go bust.
Unfortunately,
the "too big to fail" lie is still going strong. From the
government's perspective, the theory that the financial crisis had a lot to
do with the sizes of banks* is just too good to let go. This is because it
not only provides justification for the huge wealth transfer of 2008-2009 and
diverts blame from the government and the Fed; it also creates an opportunity
for the regulators to be seen as saviours rather than culprits.
President
Obama's current proposal** to limit the size and scope of the banks is the
latest in a long line of attempts to portray regulators as saviours, but we
wonder if the public is starting to 'wise up'. The proposal came in the
immediate aftermath of the Massachusetts election shock and has clearly been
designed to redirect the anger of the voting public from big government to
big banks, but could the voters finally be twigging to the reality that
what's needed, more than anything, is a smaller government? Maybe, although a
less optimistic appraisal would be that the average voter still sees no problem
with government-enforced wealth distribution as long as he/she is a direct
beneficiary of the distribution. In any case, a devout believer in central
planning will perceive every problem as a justification to expand the role of
government, even when it is patently obvious that government caused the
problem. And few are more devout than Mr. Obama.
With
regard to the so-called "too big to fail" banks, the correct
solution is very simple and requires nothing except the application of basic
property rights. The solution is to take away the legal privilege to
counterfeit money that the banks currently enjoy, thus putting the banks on a
level playing field with everyone else. Not surprisingly, this solution is
not up for consideration.
*The immense size that some banks have been able to attain is a
symptom, not a cause. It is a symptom of an inherently unstable monetary
system -- a system that allows money to be created out of nothing by the
private banks and the central bank.
**According to a White House press release last week:
"...the proposal would: 1. Limit the Scope -- The president and his
economic team will work with Congress to ensure that no bank or financial
institution that contains a bank will own, invest in or sponsor a hedge fund
or a private equity fund, or proprietary trading operations unrelated to
serving customers for its own profit. 2. Limit the Size -- The president also
announced a new proposal to limit the consolidation of our financial sector.
The presidentís proposal will place broader limits on the excessive
growth of the market share of liabilities at the largest financial firms, to
supplement existing caps on the market share of deposits."
Steve Saville
www.speculative-investor.com
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