Curing “Too Big to Fail”

I have a great idea for a law, which I offer up free. Here’s the law in its entirety: No federal funds shall be used for the purpose of preventing the financial failure of any banking institution of any size.

Simple, elegant, and it contains in it the cure for the “too big to fail” problem, which nearly bankrupted the nation a couple of years ago, and caused the worldwide crash that plagues us today. If there is one simple truth that applies to all banksters, it is that greed conquers all.

No federal funds shall be used for the purpose
of preventing the financial failure
of any banking institution of any size.

If this new law disallows the kind of bailout seen recently, the big banks have two choices:

(1) They can begin to behave responsibly, honoring their bargain with the country to be of some social value. That is, with an understanding that the relationship between them and the American people is not one-way, with all profit going to grossly overpaid banksters and filthy rich investors, and all risk going to the American public. There are a number of ways to accomplish this, such as maintaining prudent levels of cash reserves, selling only bonafied investments in real stuff, not leveraging investments to extremes, not inventing investment instruments that they know are toxic, and not hedging by betting on the failure of these investments. Banksters already know this stuff. They just chose to gamble big time instead, for which they were rewarded with a trillion dollars of our money. Non-banks might also quit acting like banks. If no bailout reward were possible, the likely result would be that they would figure out how to be safe when the next inevitable crash comes around. Otherwise, they would be out of business. Knowing this would also make their investors feel safer, and bring about at least a 50% decline of apoplexy in the rest of us.

(2) They can continue as before, and expect to collapse and die in the next market crash. This would be the sheerest sort of folly. The managers and investors would lose everything invested, and they would know it beforehand. The cost of their folly to the American public would be zero dollars, but probably a great deal of disruption. The country would go on without them with the remaining banks, the responsible ones.

Lawmakers are working hard to solve the “too big to fail” problem, we are told, but three years later we have very little to show for it. Opinion seems to be that the Dodd-Frank law doesn’t solve the problem. This simple little law would fix all that. Actually, it’s already worked in Iceland, where the people refused to let gambling banksters off the hook, and the country is recovering quickly because of it.

There’s more. The law would encourage states to form state banks, which would be able to rescue smaller banks if they deserved it. In fact, the states should do that anyway. One would hope that state and federal regulators would point out when a bank was not in compliance with law or accepted conservative practice, which is their job. Maybe that’s too much to ask.

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Published in: on 2012/01/01 at 4:48 pm  Leave a Comment  
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