Body
Just when our biggest banks thought they were out of the woods and into the money, the official consensus in their favor begins to crack. The Obama administration's publicly stated view—from the highest level in the White House—remains that the banks cannot or should not be broken up. Their argument is that the big banks can be regulated into permanently low-risk behavior.
In contrast, in an interview reported in the New York Times on October 21, Paul Volcker argues that attempts to regulate these banks will fail:
"The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank-holding company."
Volcker may not have the ear of the president (as the New York Times points out), and Alan Greenspan—also arguing for bank breakup, but along different lines—might also be ignored. But watch Mervyn King closely.
Mervyn King is governor of the Bank of England and a hugely influential figure in central banking circles. Time and again he has proved to be not only ahead of his peers in terms of thinking about the latest problems, but also the person who is best able to frame an issue and articulate potential solutions so as to draw support from other officials around the world.
Mervyn King also does not mince words. In a major speech on October 20 he said, "Never in the field of financial endeavor has so much money been owed by so few to so many. And, one might add, so far with little real reform." (full speech )
He hits hard (implicitly) at the White House's central idea on large banks: "The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion." And he lines up very much with Paul Volcker's views—breaking up big banks is necessary, doable, and actually essential.
Remember and repeat this Mervyn King line: "Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are."
The big banks will push back, of course. But Mervyn King's words mark the beginning of a new stage of real reform; the consensus starts to crack.
Also posted on Simon Johnson's blog, Baseline Scenario. The following was previously posted.
Why Is the Chamber of Commerce Defending Big Banks?
October 20, 2009
On Warren Olney's radio show, To the Point, yesterday I had a chance to talk with US Chamber of Commerce management directly regarding the issue posed here last week: Why would an organization representing three million small businesses come out in support of our largest banks? My question was picked up and focused by the host.
Warren Olney (at the 36:35 mark): "Mr. Hirschmann, back to you. Are you serving the interests of your own members, if you resist the idea of breaking up the big banks?"
David Hirschmann (leading the chamber's financial lobbying efforts): "I just don't think the question is whether we need to break up the big banks. The question is: How do we ensure that the kinds of practices that they engaged in—and others outside the banking system—don't happen anymore? Which is why we pointed to transparency in areas like derivatives and leverage." [my transcription]
Mr. Hirschmann then goes on to talk about the consumer protection agency (he's opposed).
The conflict between the chamber's principles and its actions becomes increasingly clear.
Hirschmann made some good statements, along the lines of: no one should have permanent access to the taxpayer's pocket, and any firm—no matter how large—should go out of business if its managers make the wrong decisions. This is exactly what the representative of small business should say.
But, despite being given repeated opportunity to say something at least generally along the lines of Alan Greenspan last week (e.g., "too big to fail is too big to exist"), Hirschmann retreated into platitudes about the need to modernize our entire regulatory system.
At the same time, he emphasized that the chamber is adamantly opposed to the main piece of this modernization—as proposed by the administration—which is a new agency to protect consumers vis-à-vis financial products.
He didn't dispute that the actions of our largest financial players have seriously hurt small business people —through bringing about a massive financial crisis and deep recession—but the chamber apparently favors just reshuffling regulatory responsibilities and more "transparency" on all sides.
There is a long tradition in the United States of big business trampling on independent entrepreneurs, and of those entrepreneurs fighting back through the ballot box. This time around, big banks captured their regulators, badly damaged small firms, and look set to do it again.
Why is the Chamber of Commerce refusing to stand up for small business?
Who Is Carlos Slim?
October 17, 2009
The United States increasingly displays characteristics that we have seen many times in middle-income "emerging markets"—new dimensions of vast inequality, forms of financial instability that benefit the best connected, and consistently easy credit for the privileged. But this raises the question: Who exactly is going to dominate our economic and political landscape moving forward?
In most emerging markets, a major crisis means that some powerful people and their firms fall from grace. After the Asian Financial Crisis (1997–98), some of the biggest Korean chaebols disappeared or broke up, numerous Thai bankers lost their top positions, and there was a discreet reshuffle among the Malaysian business elite. Russian oligarchs rise and fall with the price of oil; the process in Ukraine is similar, although somewhat murkier.
With every sharp turn of the cycle, new people rise to the front—taking advantage of low asset prices and the fact that most people struggle to borrow on reasonable terms. In Mexico, after the crisis of 1994–95, Carlos Slim consolidated his position in telecoms and used this as a launching pad to become one of the world's richest people.
Three sets of players look positioned to do the same in the United States today, mostly based on the amazing set of "carry trades" available if you have access to large amounts of cheap short-term funding (e.g., along the yield curve, from dollars into other currencies, and—arguably—into equity in some parts of the world).
First, obviously nothing can stop Goldman Sachs and JPMorgan. With unfettered access to the Federal Reserve and no effective controls on their ability to take risk, they are in the catbird seat. The weakness of other big banks is further icing on their cake. GS and JPM are symbols that will loom large over the national and international economy for a long time to come, with the main threat (to them) coming from their rather too blatant market share in many products.
Second, the surviving big hedge funds will do very well (partial list). They can move fast, they have no regard for anything other than profit, and they will not be effectively regulated. Their access to credit runs through the biggest banks and this can be a double-edged sword—expect more instability in the future from hedge fund–bank dynamics (as Morgan Stanley found out last fall).
Third, foreign players with sovereign backing are also going to clean up. Their credit access comes not from the Fed (although our low rates help their funding costs), but from the fact that they control or are controlled by creditworthy government elites. These foreigners will be relatively diverse (European and Asian, with perhaps some others in the mix) and they have learned to be discreet within the United States. But a great deal of the speculative business to be had is cross border, with a funding leg in the United States and a high-risk asset piece in emerging markets; they are in a great position to do this.
Top people in the Obama administration now begin to understand what they have wrought. The body language becomes uncomfortable when you bring up this topic and they are eager to discuss alternative ways forward.
But we are entering a new, more global era of state capture, and the US government (or, more precisely, its credit) was handed over—rather meekly—during the past 12 months.
Many states have been taken over by bankers; there is no shame in fighting and losing against what Jefferson called the "monied aristocracy." But few governments, even the weakest, have handed over the keys as quietly as we did. As Lloyd Blankfein said to an aide on their way to the greatest sales job in the history of the republic, "You're getting out of a Mercedes to go to the New York Federal Reserve. You're not getting out of a Higgins boat on Omaha beach."
The winners among our financial elite are very far from the Greatest Generation, but they are the Best Paid Generation for a reason.
