Bigger isn’t always better. And certainly not when banks are the subject at hand and when they become “too big to fail.”
Of course, banks, no matter how large they become, are perfectly capable of failing. But when that failure would result in economic chaos, the federal government feels obliged to step in, as it did during the financial crisis of 2008.
An unlikely pair of U.S. senators, Democrat Sherrod Brown of Ohio and Republican David Vitter of Louisiana, have proposed legislation that would at least discourage rampant expansion of too-big-to-fail institutions, and it should be getting more attention and support than it has.
Federal Reserve Chairman Ben Bernanke gave his definition of too big to fail in 2010, describing a firm whose “size, complexity, interconnectedness and critical function are such that, should the firm go unexpectedly into liquidation, the rest of the financial system and the economy would face severe adverse consequences.”
So when the boat starts sinking because the fat guy poked his foot through the bottom, everybody has to help bale, or everybody — guilty and innocent alike — will otherwise go down with the boat.
Past and future
It’s not fair, but it’s happened before, and it will happen again unless something is done.
And here’s perhaps the most surprising thing: Since the near catastrophe of 2008, the big banks that the taxpayers stepped in to save haven’t gotten smaller, they’ve gotten bigger.
And here’s perhaps the most alarming thing: There seems to be little stomach in Washington to do anything about that.
The bill sponsored by Brown and Vitter wouldn’t break up the megabanks, but would require them to maintain levels of capital that would allow them to better absorb almost-inevitable losses. They’d have to maintain enough of a cushion that if they made risky investments, they’d be gambling with their money, not taxpayer money.
But even that prospect has gotten the attention of the megabanks and their lobbyists, who have already begun putting pressure on members of Congress to run — not walk — away from Brown and Vitter.
The smaller community banks would benefit under the Brown-Vitter bill because it would level the playing field, but they don’t have the lobbying power of their giant brethren.
It may be that the only hope for this bill is a grass-roots effort, but it is difficult to get the American people excited about a bank’s capital ratio as a percent of assets.
Tell people that in spite of its key role in creating the financial crisis of 2008, the American banking industry has grown bigger, more profitable, and more resistant to regulation than ever, and most are likely to do no more than feign interest. Point out that the country’s six megabanks hold assets equal to 60 percent of the country’s gross domestic product and you might get a raised eyebrow. Thinking about what might happen if one or two of those banks were to fail is, well, just too speculative to inspire outrage.
But there will be outrage if the worst happens. And then it will be too late.
There are a few more important things languishing in Congress than addressing the potential cost to the taxpayers if they have to bailout the megabanks again — or the even larger cost if a bailout is impossible. But there aren’t that many.
The lack of public support Brown-Vitter is getting can be attributed to most people having other things in their daily lives that distract them or get priority. But Congress knows better. At best, Congress is failing to act out of willful ignorance. More likely, Congress is doing the math and deciding that it is better to take the banks’ campaign donations today and worry about what might happen tomorrow. Who knows, by the time another 2008 comes around they may be retired, and it will be some other representative or senator’s problem.
But make no mistake, when it happens, it will be the taxpayer’s problem.