Obama to propose new limits bank size, "return to the spirit of Glass-Seagall"

[The Duke]

If we're bringing back the spirit of Glass-Steagall why not just, you know, bring back the actual Glass-Steagall?

And this does nothing to reign in the most reckless practices of the banks.  It only regulates their size.

And I like how the Dems on the board are oblivious to the absurd political theater.  Dems lose the election in Massachusetts and decide to run against the banks in the mid-terms even though they're just going to have their own committee chairman kill the bill later when no one is looking.  This is as cynical as it gets.

[Kaine for Senate '18]

Or is there still too much banking influence on Capitol Hill?

That.  The banks and the insurance companies basically run this country now.

[Torie]

I strongly agree with Obama on this. I would like to never have to see a repeat of the "too big to fail" syndrome. It has become clear that certain activities of banks cause them to incur too much risk causing them to fail when the economy takes a dump, and given the central role banks have in shaping the macro economic environment (including the size of the money supply among other things - it goes up when they lend, and down when they don't), those activities need to be separated from lending and any money which has FDIC insurance.

  I am sure most would agree with me on this, no?

Not me.  I just don't get what a return to Glass-Steagall has to do with the last financial crisis.  The entities that were centrally involved - Lehman, Bear Stearns, AIG, etc. - weren't consumer banks.  They were investment banks that took on too much risk.  The government didn't have to step up at all when the entities failed - and didn't do so for Bear Stearns anyway.

If anything, the repeal of Glass Steagall HELPED because Bank of America wouldn't have been able to absorb Merill Lynch under the old rules.

What Obama is proposing is like treating a virus with penicillin - it sounds like a good idea, but won't work.  He's fighting the wrong battle.

In short order the banks got involved, and the largest ones had to be bailed out - all of them except I think Morgan Stanley and Wells Fargo (the latter being the bank with the smartest personnel and best run since well, as long as I remember) if I recall correctly. I think it sensible to cut down the market share of any one bank. Of course capitalization requirements need to be beefed up as well, and made more sensitive to risky instruments, with the most complex ones prohibited from banks owning them. And non bank financial institutions  need to be regulated more tightly too, since obviously Lehman's collapse turned out to be pretty dire.

But yes, the real culprit of the collapse was the real estate bubble, and that was fueled in large part by governmental action and pressure, with pressure from the Dems to make unsound mortgage loans, to help "poors" buy homes, with the failed Fannie and Freddie buying the garbage, and what they didn't buy being securitized, and then leveraged, led to the fall.  

Financial institutions just have too much of an impact on macro economics, and pose too much of a moral hazard, to do anything other than tightly regulate them. This is not an ideological matter with me, it is a prudential matter based on the facts, and how macro economics now works, as I understand it. Granted, I am not an expert at this stuff. Maybe someone could persuade me that I am all wet, but I doubt it.

Barney Frank may be right however, that one needs to be cautious, and avoid forcing such institutions to divest assets at fire sale prices. So the process of unwinding all of this needs to be with great care.

[Beet]

The idea 'too big to fail = too big to exist' is sweet, but I don't think it's workable. The problem is not the size of the firms, the problem is with the size of the bubbles and the leverage that depend on them. If you have a bubble that is X size, it does not matter what the size of the firms are. The bubble could take down 1 large firm, or 1000 small firms, it doesn't matter. The choice could still be between bailout of catastrophe. The only way to prevent a future repeat of 2008-09 is to prevent massive bubbles built on massive leverage.

[Torie]

The idea 'too big to fail = too big to exist' is sweet, but I don't think it's workable. The problem is not the size of the firms, the problem is with the size of the bubbles and the leverage that depend on them. If you have a bubble that is X size, it does not matter what the size of the firms are. The bubble could take down 1 large firm, or 1000 small firms, it doesn't matter. The choice could still be between bailout of catastrophe. The only way to prevent a future repeat of 2008-09 is to prevent massive bubbles built on massive leverage.

Good point, but the too big to fail issue  still obtains, even if, due to government regulatory failures, and pushing of the writing of substandard mortgages, that in this case would not have prevented the financial meltdown.

[Beet]

In theory yes, but in what possible scenario does a firm that is 'too big to fail', fail, except in the case of massive economic catastrophe?

[Torie]

In theory yes, but in what possible scenario does a firm that is 'too big to fail', fail, except in the case of massive economic catastrophe?

I am older than you. The Feds bailed out Continental Bank over its bad oil loans back in the early 1980's, and Security Pacific was forced into a shot gun take over, because it was too big to fail, so yes, the phenomenon has really happened even if there was not a generalized collapse that basically without government intervention, would have tanked most banks, the big ones first, and the smaller ones later.

In fact, smaller banks as we speak are still failing, and being liquidated (which is what should happen rather than being bailed out), and a lot more would fail immediately if they had to mark to market their loan portfolios (which they don't due to a regulatory change so that we can pretend the banks are solvent, when they are not). The "fix" has been to allow banks to make huge profits to dig out of the hole (they can obtain money for less than 1%, and lend to out at 6%-7%, or just buy treasuries at 4% which many of them are doing), and get fat off the spread without incurring much if any risk. I think the market might be upset that Obama is perceived as maybe tacking so that banks can no longer dig themselves as easily out of the hole.

[Beet]

You're talking about Continental Illinois? I'm not old enough to remember all the government's bailouts, but just because the government bails out a company, it doesn't mean it's 'too big to fail'. This may be a matter of semantics, but a legitimately too big to fail company, in my mind, is a company whose failure would result in a systemic crisis. Not just a recession or a crisis within one industry but a full blown financial meltdown. As far as I know, at no time during the Savings & Loan crisis of the 1980s was this really a possibility.

The government has, unfortunately, bailed out many companies that were not really 'too big to fail'-- railroads, Lockheed, Chrysler, and probably a number of banks. A 'too big to fail' situation never truly presented itself until 2008.

I oppose all bailouts except in the case that the company is legitimately 'too big to fail'.

If Continental Bank/Security Pacific had not been bailed out, would we have gone into a Depression?

[Torie]

You're talking about Continental Illinois? I'm not old enough to remember all the government's bailouts, but just because the government bails out a company, it doesn't mean it's 'too big to fail'. This may be a matter of semantics, but a legitimately too big to fail company, in my mind, is a company whose failure would result in a systemic crisis. Not just a recession or a crisis within one industry but a full blown financial meltdown. As far as I know, at no time during the Savings & Loan crisis of the 1980s was this really a possibility.

The government has, unfortunately, bailed out many companies that were not really 'too big to fail'-- railroads, Lockheed, Chrysler, and probably a number of banks. A 'too big to fail' situation never truly presented itself until 2008.

I oppose all bailouts except in the case that the company is legitimately 'too big to fail'.

If Continental Bank/Security Pacific had not been bailed out, would we have gone into a Depression?

We would have had a severe economic dislocation, not as severe as the present one obviously. That is why Continental was bailed out. The government indeed thought from that perspective it was too big to fail.

[Beet]

I love the phrase "severe economic dislocation", it can mean anything from several thousand workers being fired to the end of the world.

On a more serious note, even the current situation is not the model case for what a bailout of a TBTF firm would be designed to prevent-- although admittedly it would be a serious candidate. The model is case is what would have happened had Fannie, Freddie, and AIG not been bailed out.

[Padfoot]

Good. Too big to fail=too big to exist.

^^^^^^^^^^^^^^

[opebo]

Good. Too big to fail=too big to exist.

^^^^^^^^^^^^^^

I disagree.  They should exist, but they should be recognized and run for what they are in practice - parts of the State.

[Grumpier Than Uncle Joe]

I think it's funny that Obama is preaching a return to it, since it was Clinton who signed to repeal it.

[Franzl]

I think it's funny that Obama is preaching a return to it, since it was Clinton who signed to repeal it.

Just because Clinton did it, doesn't make it right. Clinton also signed Defense of Marriage

[Beet]

Clinton signed a lot of Rubinite crap during his second term. Besides repeal of Glass Steagall, the Commodities Future Modernization Act, he also signed the 1997 capital gains tax cut on homes, which helped fuel the housing bubble by making "house flipping" profitable for the first time in decades.

Granted all of these were supported by a Republican Congress and in the case of CFMA and Glass Steagall it was veto proof.