Too big to fail?

[Saurabh]

Hi,

I would like to propose a discussion on an issue which is very relevant in today's economic context:

Is there a 'rational' case for splitting the banks by business activity (e.g. Retail banking, Corporate Banking, etc)?

A recent article in FT got me thinking about this. I wonder how can we look at this problem using the principles of 'Objectivism'.

- On one hand there is the issue of giving the banks the freedom to decide how they wish to organize.

- On the other side there is the issue of preventing the bank failures from disrupting the economy.

Please let me know if anyone is interested in discussing this topic. Thanks!

The link to the article:

http://www.ft.com/cms/s/0/a11e34ac-c3fc-11...144feab49a.html

Edited November 13, 2009 by Saurabh

[brian0918]

Rational case for force? No.

The sooner customers demand transparency, the sooner we'll have stability. Trying to get that stability through force is unjustifiable.

Edited November 13, 2009 by brian0918

[Saurabh]

Rational case for force? No.

The sooner customers demand transparency, the sooner we'll have stability. Trying to get that stability through force is unjustifiable.

I really like your crisp answer. Thanks.

Would you say that regulation is force (always)?

[freestyle]

If something were supposedly "too big to fail" then what about that entity that is somehow big enough to "save" it from failing? Didn't it fail already by having to be "saved" or propped up?

Nothing is too big too fail. That is a ridiculous notion that politicians used to steal/print/shift money in the form of the TARP bailouts. The Sun is not even too big to fail. In fact, I believe it is scheduled to fail in about 5 or 6 billion years from now.

Moral hazard is the problem.

[brian0918]

The whole concept "too big to fail" assumes a common goal that is necessarily contrary to the personal goals of individuals. Any time anyone claims that something is bad, good, too big, too powerful, too whatever, ask them "for what goal" and you will expose the central planner mentality that substitutes individual goals for goals of the collective.

I don't disagree with the idea that the system can be more efficient. I just disagree with the idea that such efficiency should be forced on people at the expense of their rights. The ends do not justify the means.

[Jake_Ellison]

I really like your crisp answer. Thanks.

Would you say that regulation is force (always)?

All government action is force. The question then is whether it is initiation of force or not. If it's not, then it might be justified.

Regulating free trade is always initiation of force, because free trade is by definition not a violation of individual rights. Government action, of course, is only justified if it prevents specific instances of rights violations, or types of actions that are, by their nature, rights violations.

Edited November 14, 2009 by Jake_Ellison

[Saurabh]

All government action is force. The question then is whether it is initiation of force or not. If it's not, then it might be justified.

Regulating free trade is always initiation of force, because free trade is by definition not a violation of individual rights. Government action, of course, is only justified if it prevents specific instances of rights violations, or types of actions that are, by their nature, rights violations.

Freestyle, Brian0918 and Jake,

Your responses make a lot of sense to me.

The question that now nags me is what should be an appropriate solution in this situation (instead of forcing the banks to split)?

I know Brain0918 mentioned about customer demanding more transparency and possibiity of making the system more efficient; but can we make this solutions more concrete?

I wonder if AR center (or any other Objectivist organization) have taken any position on this.

[Jake_Ellison]

The question that now nags me is what should be an appropriate solution in this situation (instead of forcing the banks to split)?

I know Brain0918 mentioned about customer demanding more transparency and possibiity of making the system more efficient; but can we make this solutions more concrete?

As soon as you name a concrete problem (and prove it is a problem), we might be able to come up with a concrete solution.

Until then, I maintain that in a free market there are no problems for the government to solve, except for the problem of punishing criminals.

[Black Wolf]

I've always wondered if businesses being told that they're "too big to fail" has resulted in the economic crisis.

Didn't banks originally not want a bailout?

I'm certain that competition with Fannie Mae and Freddie Mac is more to blame than this shit.

[softwareNerd]

The underlying problem is that the U.S. government (via the FDIC) has insured bank deposits up to $250,000. In addition to this, the U.S. government recently underwrote quite bit of bank debt. Finally, there are all sorts of implicit though fuzzy guarantees from the government. Those are the things that need to change.

If the government is underwriting financial firms, it will want to hold them to certain standards. There are already lots of such standards in place, and this idea of limiting what banks can do will be one more. Government standards are usually bureaucratic and inefficient. Still, it is the underlying guarantee that needs to be undone.

[Robert J. Kolker]

I really like your crisp answer. Thanks.

Would you say that regulation is force (always)?

Not when the regulation is to deter or prevent fraud. Fraud is the initiation of force.

Bob Kolker

[Greebo]

The only rational case is for the elimination of the Fed, Fannie, Freddie, FDIC, FHA, VA, and HUD which all serve to prop up the industry to serve the interests of a few at the cost of the many, encouraging the industry to take risks it should not.

[agrippa1]

The underlying problem is that the U.S. government (via the FDIC) has insured bank deposits up to $250,000. In addition to this, the U.S. government recently underwrote quite bit of bank debt. Finally, there are all sorts of implicit though fuzzy guarantees from the government. Those are the things that need to change.

If the government is underwriting financial firms, it will want to hold them to certain standards. There are already lots of such standards in place, and this idea of limiting what banks can do will be one more. Government standards are usually bureaucratic and inefficient. Still, it is the underlying guarantee that needs to be undone.

There are a lot of underlying problems. In this mess, it was the gov't guaranteeing risk for Fannie and Fred so they could sell MBS to Wall Street that was a big problem. Once Fan and Fred allowed banks to short circuit the reserve limits on total mortgage loans, all bets were off. And if that wasn't bad enough, when the loans started falling off because credit demand dried up, the gov't loosened lending standards, created exotic loans that were not really loans but gov't-sponsored speculative leveraging, and talked up that speculation:

Calculations by market analysts of the "option adjusted spread" on mortgages suggest that the cost of these benefits conferred by fixed-rate mortgages can range from 0.5 percent to 1.2 percent, raising homeowners' annual after-tax mortgage payments by several thousand dollars. Indeed, recent research within the Federal Reserve suggests that many homeowners might have saved tens of thousands of dollars had they held adjustable-rate mortgages rather than fixed-rate mortgages during the past decade

-Alan Greenspan, Feb. 23, 2004

This from the man who held the controls of interest rates over that decade.

It wasn't long before FHA was opening up Option ARM's with nothing down to first time homebuyers with barely enough income to cover the minimum payments and no assets to fall back on, save what they could gain from equity inflation after the purchase.

If the government had consciously engineered a massive bubble and credit collapse, they could not have been more effective than the Fed, FHA, Congress and the GSE's were in this case. They did everything exactly right.