Break up the banks!
Finally someone with real power in the current financial world has stated the obvious: The world’s big banks need to be broken up into utilities that do what you and I think of as banking and speculative trading companies that take risky bets on the markets with their own money.
The speaker of such truths: Mervyn King, Governor of the Bank of England.
Proposed market reforms, including rules that would require banks to raise more capital, don’t address the basic danger posed by banks that are too big to fail, King said in a speech on October 20 in Edinburgh.
Requiring banks to keep more capital wouldn’t create a big enough margin of safety as long as big banks were free to engage in unlimited risk taking with the expectation that tax payers would pick up the tab for any losses large enough to endanger the financial system.
King echoed recent comments from former Federal Reserve chairman Paul Volcker who is now serving as an advisor to the Obama administration. Volcker has called for separating retail banking from trading units that risk the bank’s own capital in the markets.
King’s speech puts added pressure on British Prime Minister Gordon Brown to deliver promised regulation that would require banks to write living wills that regulators would use to wind down a bank if it faced bankruptcy.
And King’s words actually stand some chance of changing government policy. The United Kingdom is in the midst of an election campaign that’s like to turn Prime Minister Brown’s Labor government out of office. The Conservative Party, currently in the lead in polling, picked up on King’s remarks to criticize the government’s policies during the crisis.
Here’s my favorite line from King’s speech: “The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.”
Can’t ask for anything clearer than that.
Over to you in the United States Chairman Bernanke and Secretary Geithner.
Related Posts
No related posts.
15 comments
Post a comment
Comments that include profanity, or personal attacks, or antisocial behavior such as "spamming" or "trolling," or other inappropriate comments or material will be removed from the site. We will take steps to block users who violate any of our terms of use. You are fully responsible for the content that you post.
Gee, does Glass-Steagall ring a bell?
Hankztur, that is exactly what I was thinking!
The US had pretty much that law (Glass-Steagall from the depression era) and the big banks managed to get rid of it and other laws bit by bit and the final law just before they blew things up! And on top of that they even got it past the politicians that non-banks could declare themselves as “banks” during the crisis they created so that they could share in the bailouts.
Christopher, the way I see it, it’s seems to be very easy to get stuff past the politicians and their regulators. And that’s the problem! They’re suppose to be watching our backs, but we seem to get shot in the butt every time.
Just this afternoon, apparently responding to Gov. King’s speech, US Fed Reserve Gov. Tarullo called the latest reforms efforts on Capitol Hill inadequate in regards to the “too big to fail” problem. However, he label the calls to break up the large financial firms as “provocative” and called instead for more regulation.
Its worth noting that the deregulation of the US financial system began during the Reagan years, in response to the challenge of the Japanese banks that appeared ready to dominate int’l banking. The very same banking system that collapsed just a few years later from overspeculation.
I doubt there would be too many people crying (outside of bank boardrooms) if they simply reinstituted Glass-Steagall lock, stock, and barrel. Especially since, aren’t Chinese banks forced to abide by Glass-Steagall-like regulations right now? It seems that in stark contrast to the 80′s and 90′s, the pressure to impose these restrictions is stronger than the pressure to keep on doing without them.
Yep- we need to get everybody- including your grandma, Jim- re-Glass-Steagalled. Including the insurance companies, the banks, the brokers, the venture capitlists, the mutual funds, the investment bankers, and GE, and CAT and GM and even Deere and Boeing. Walmart, before they take up financial services as part of the business- aisle 26. Did I forget anyone, important?
Barney and Chris could help Ben and Tim with this, altho I suspect they would all much prefer to help their financial industry buddies first, then help themselves second and foremnost. Help the people?- watch yer butt [as the man said].
As others have said….. what is the great mystery here? Glass-Steagall should have never been repealed. It was stupid to repeal it and it’s stupid to leave it that way. Banking and Insurance funds should not in any way mingle with risk capitol. If an investment house goes belly-up, they should be able to do so without affecting the country’s financial system.
Reform?!
http://www.pbs.org/wgbh/pages/frontline/warning/
It must change. Perhaps the Europeans will make the first move, and after the next time the American systems collapses, we’ll follow their lead. We can’t do it this time, there is too much opportunity for the banks to scam the American (and international) public one more time. The lobbyists run the country on behalf of the big banks. Realistically, we’ll likely not inact a G-Steagall type legislation until we have to bail them out again, then the outcry will be large enough that it’ll finally happen.
I don’t like bailing out someone else’s bad bets. But wait, when they make a profit, they get to keep it for being “smarter than joe-average in a free-market society?” BS I say.
“Break up”? “Glass-Steagall law? What do you all think? Did you all read yesterday’s news that Obama is pressing Wall St. for fundraising? Wall St. AND banks will get exactly what their money paid for! That’s America now!
YX: I drew pretty much the opposite conclusion from that news. MSNBC’s site had a decent summary of my reasoning here, under “When the C.W. is wrong”: http://firstread.msnbc.msn.com/archive/2009/10/20/2103490.aspx
Legislation similar to Glass-Steagall a bad idea.
1. This will place American based banks at a disadvantage on the international level. This is a global market place whether you like it or not.
2. The federal government can not and will not execute such policy to the benefit of tax payers. EVER.
3. The risky behavior would not be funded if it were not for the government bailouts and aggressive corporate tax structure.
4. will reduce the power of the Federal Reserve outside of the United States.
Re-instating Glass-Steagall is a great idea, and should be done this week.
But more than that we need Campaign Finace reform. Real Reform. All Federal Campaigns should be financed by the Federal treasury, with no exceptions. Then we might get back to the pre-Reagan Era.
Re-instating the Glass-Steagall act is a great idea. It should be done this week.
But more than that we need Campaign Finance reform. All federal Campaigns should be financed from the Federal treasury with no exceptions. Then maybe we can get back to the pre-Reagan Era.
cjxland, you make a great point. Finance has changed just a bit since Glass-Steagall was enacted in 1933 (as I remember–I was just a babe in swaddling, tho). Remember that it was the financing arms of GM and Ford that first supported the car companies and then almost took them both down. GE is a huge mortgage lender. Whatever gets put in place has to cover a lot more than just “banks.”