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Too Big to Fail is Too Big

Posted by David Korten at Mar 16, 2009 12:00 AM |

Major responsibility for the financial collapse rests with the deregulation process that allowed for the consolidation of banking power in the hands of Wall Street. Reversing that process should be an immediate priority.

In a September 22, 2008 interview with Amy Goodman on Democracy Now!, Senator Bernie Sanders famously said that if a bank "is too big to fail, it probably is too big to exist." That should be a watchword slogan of any effort to fix the financial system. Major responsibility for the financial collapse rests with the deregulation process that allowed for the consolidation of banking power in the hands of Wall Street. Reversing that process should be an immediate priority.

Before Wall Street there was Main Street

I recall the time when banks were community institutions that were limited by law to being single outlet community service organizations. It was called unitary banking. Each bank was rooted in and expected to serve the needs of its community. Deregulation unleashed a wave of consolidation through mergers and acquisitions that shifted the focus from serving Main Street to making as much money as possible for Wall Street. To have a financial system that works, we must reverse the deregulation process and restore the concept of community banking. Nothing less is going to solve the problem.

Wall Street holds government hostage

In a March 8, 2009 CBS Sixty Minutes interview with Sheila Bair, head of the FDIC, it was noted that when one of the smaller banks fails, it is taken over by the FDIC. The depositors are protected by the FDIC. The owners, however, lose everything.

In the interview with Blair, which comes toward the end of the segment documenting the FDIC take over of a small failed bank, she notes that the FDIC doesn't have the jurisdiction to take over the large Wall Street financial conglomerates that bear the major responsibility for the financial collapse. As the moderator points out, the owners and managers of the small banks are left with nothing. The big banks get government bailouts.

Of the latter Blair says, "Going forward, I think we need to really review the size of these institutions and whether we should do something about that, frankly… I think that may be something that Congress needs to think about… I think taxpayers rightfully should ask that if an institution has become so large that there is no alternative except for the taxpayers to provide support, should we allow so many institutions to exceed that kind of threshold?"

It is encouraging that this question is being raised by a top government official in the financial sector as it is exactly what Congress needs to address. Unfortunately, the FDIC is not acting on the advice of its own head. Rather than breaking up the bank it took over in Chicago and selling each of its five branches individually to local investors to operate as local community banks, the FDIC quickly sold the whole operation to a larger regional bank, moving in exactly the opposite direction from that Blair is herself suggesting. Of course moving toward greater consolidation under a bigger established bank is a lot easier for the FDIC than selling individual banks to individual investor groups that may have very little banking experience. Moving to deconcentration and decentralization takes serious effort.

Bailout now, solutions later?

The need to break up big banks also came up in a March 15, 2009 episode of Sixty Minutes in what is billed as the first ever media interview with a Federal Reserve chairman. In this interview Fed Chairman Ben Bernanke discusses the Fed's functions and its response to the financial crisis.

In Part I. Bernanke makes explicit reference to a trillion dollars the Federal Reserve has loaned to troubled banks at a near zero interest rate in the hope they will use it to get credit flowing again. He explains that the Fed essentially printed the money simply by entering numbers into the Federal Reserve accounts of the assisted banks. This is essentially giving the private banks that created the crisis free use of a trillion dollars. There is no mention in the interview about who received the money, how it is being used, what rules apply, or whether there is any oversight.

Bernanke argues that given the emergency, the Fed must give priority to getting money flowing through the banking system by pouring in money. He mentions a need to implement new regulatory measures and force the break up of the big banks, but calls for doing so after the system is stabilized.

In Part II, the 60 minutes moderator asks Bernanke: "How do we prevent this from occurring another time?" Bernanke responds: "Well, tougher regulation of large firms. It includes having a set of laws that allows us to wind down a large, internationally active firm, without the adverse impacts on the markets that a disorderly bankruptcy would have. It includes possibly having a systemic regulator. A regulator that has some responsibility to look at the system as a whole."

Restructure first

At first glance, Bernanke's plan for stability first and restructuring later sounds sensible and responsible. It is, however, technically and politically naive. You can't fill a bucket with no bottom. Wall Street institutions have already demonstrated that they can divert bailout money to private ends with no evident public benefit as fast as government can pour it in.

Assume for the sake of argument that the Federal Reserve is successful and the big banks do open the flow of credit to productive ends. Will Wall Street reform follow?

Not likely. The pressure will be off and Wall Street interests will be in full voice shouting: "The system is working. Interference by government is an unwarranted socialist intrusion on the market and private interests. It will have terrible consequences for the economy." Politicians who depend on Wall Street political donations will fold their reform tent, and Wall Street will get on with creating the next financial bubble in a build up to the next crash.

Wall Street will continue to play out its extortion racket so long as the public is willing to put up with the bailout first, reform later capitulation of the Federal Reserve and the FDIC. There must be a strong and immediate public demand to restructure first.

The government needs to take over the big banks now, as many leading economists are advocating. Sorting out the tainted assets after the banks are nationalized will be a great deal easier and cheaper.

Once cleaned up, government should sell the banks to private investors, but not to Wall Street predators to run into the ground again. Break them up and sell the pieces to local investors to operate as community banks, mutual savings and loan associations, and credit unions within a strict regulatory framework that restores the concept of individual local banks devoted to meeting the financial service needs of their communities. Never again should any private bank be accountable only to Wall Street or be too big to fail.


David Korten wrote this article in response to CBS's Sixty Minutes interview with Ben Bernanke, March 15, 2009. David's latest book is Agenda for a New Economy: From Phantom Wealth to Real Wealth (published by Berrett-Koehler, Feb 2009). Read an excerpt. David is also the author of the international bestseller When Corporations Rule the World and The Great Turning: From Empire to Earth Community. He is co-founder and board chair of YES! Magazine, and a board member of the Business Alliance for Local Living Economies.

www.davidkorten.org

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