I was glad to see three pieces in the The New York Times or on its website this weekend about Too Big to Fail.
Eric Dash wrote a news analysis in the Week of Review yesterday. Gretchen Morgenson wrote a column about it yesterday. Paul Krugman blogged about it on Thursday. So how’d they do?
I think there’s some great stuff in Dash’s piece. But Columbia’s Todd Gitlin, writing at Talking Points Memo, is correct when he says it falls into He Said/She Said syndrome in places. Here’s Gitlin:
Eric Dash has the right idea, to peek under the curtain of Too-Big-To-Fail, but gets us not a half-step toward an answer. The experts are quoted saying things like “I don’t think you can completely turn back the clock” (Lawrence Summers) and “You can’t put that genie in the bottle again,” (Frederic S. Mishkin, a former Federal Reserve governor).
If “there’s no going back to the days of small banks” (Dash’s paraphrase of Summers), just why is that? What do those like Sheila Bair of FDIC, and Paul Volcker, former head of the Fed, say to this claim? (It doesn’t deserve the name of an argument.) Who would gain, who would lose if we went back to small(er) banks? What would be some predictable knock-on effects?
Just because Larry Summers says so doesn’t make it so, and there’s a long record to prove that. What’s his reasoning? We should have been told.
And then there’s this bit of nonsense, from a Treasury flack no less:
“You have to be flexible,” said Andrew Williams, a Treasury Department spokesman. “You have to be clear that there is not a presumption of too big to fail. But you can’t give it up entirely because to do so may not allow you to avoid, in extremis, a major meltdown.”
But I found a lot of redeeming stuff in Dash’s piece, including the simple fact that he took on the topic—something of an Audit hobbyhorse—to begin with. There’s interesting background on the genesis of the Too Big to Fail concept—with the 1914 bailout of New York City, and context on administration officials like Sheila Bair and Paul Volcker who disagree with the Summers/Geithner Axis of Appeasement. He also notes that the TBTF problem has gotten worse since the crisis started.
And his lede is killer:
Nearly a century ago, the jurist Louis Brandeis railed against what he called the “curse of bigness.” He warned that banks, railroads and steel companies had grown so huge that they were lording it over the nation’s economic and political life.
“Size, we are told, is not a crime,” Brandeis wrote. “But size may, at least, become noxious by reason of the means through which it is attained or the uses to which it is put.”
Tell that to Krugman. He dismisses doing anything about Too Big to Fail, saying “it’s just not possible” to make firms shrink enough to do so and pointing out that it was “Lehman —not Citi or B of A — that brought the world to the brink.” He says beefed-up regulatory oversight is the answer.
I realize this is like the pipsqueak advising the heavyweight champ how to fight, but um, neither Citi nor BofA failed. God help us if either had. And Lehman wasn’t exactly a boutique firm, anyway. It had $613 billion in debt and $639 billion in assets when it folded—six times the size of the previous record holder for biggest bankruptcy.
Had Lehman been, say, the size of WorldCom, the company it eclipsed in the Guinness Book, it would have been much less likely to bring down the whole economy, no? And it would have been much cheaper for us to bail out in the first place
In the vein of the Brandeis quote above, Barry Ritholtz points out there are other serious problems—beyond moral hazard—with concentrations of power and wealth:
When companies get to be that large, their vast wealth buys influence and power and corrupts the political system. Despite the crisis caused by the banks, just look at how successful their lobbying effort was. Their enormous pushback effectively neutered any true regulation of the financial sector.
Another word for this is oligarchy. This is so obvious it’s hard to believe it has to be pointed out.
Felix Salmon also has a smart rejoinder to Krugman’s assertion:
There will always be too-big-to-fail banks, no matter where the current debate leads us. When I say that banks’ balance sheets should be capped at $300 billion, I’m not for a minute saying that $300 billion is small enough to fail; I’m just saying that such banks are small enough to rescue. Too big to fail we can cope with, by rescuing banks rather than letting them fail. Too big to rescue we can’t cope with. And right now, the big four banks in the US are too big to rescue. Which is scary.
Another point that’s little discussed is that these economy-endangering corporations got that way with the help of lax regulation and antitrust enforcement. Most giant American corporations didn’t get huge through organic growth—Wall Street speak for growing by acquiring more customers rather than through mergers and acquisitions. Certainly, no American banks got that way organically.
Nouriel Roubini gets it, too:
Banks that are too big to fail are simply too big, he said, and regulators should “clamp down on them much more strongly” with greater liquidity and capital requirements and rules on leverage, to make sure they are going to be broken up, he added….
“These banks that were already huge have become even bigger and now we have to figure out how to slim them down,” Roubini said. “I don’t think we have addressed this big problem.”
Nicole Gelinas of the Manhattan Institute does too, over at National Review.
Morgenson’s common-sense rebuttal to Krugman and his emphasis on regulation of the status quo is as effective as any:
More than two years after the crisis began, “too big to fail” remains “too problematic to address” with anything other than more souped-up regulation. Given that earlier efforts at policing these entities failed so miserably, why should anyone think that a new-and-improved regulatory approach will fare better?
And this makes sense:
Rather than propose ways to shrink these companies and the risks they pose, the Geithner plan argues instead for enhanced regulatory oversight of the behemoths. This suggests the taxpayer safety net will be larger after our national financial train wreck, not smaller.
It’s good to see this discussion finally bubbling to the surface, and it’ll happen whether Krugman wants it to or not. It’s too important.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.