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[prytania3]

From today's Huffington Post:

"Three things," the senator [Dorgan] told me in an interview. "One is to separate investment banks and FDIC-insured banks. Second, prohibit FDIC-insured banks from dealing in risky financial instruments on their own proprietary accounts... And third, abolish 'too big to fail.' If you're too big to fail, you're too big. Too big to fail is what I call no-fault capitalism."

I should clarify. I think it's fine for the commercial banks to diversify on the investment banking end. What I don't think is okay is that the FDIC insures them. You know, do what you want, but don't expect the government to have your back.

[mad_doctor]

From today's Huffington Post:

"Three things," the senator [Dorgan] told me in an interview. "One is to separate investment banks and FDIC-insured banks. Second, prohibit FDIC-insured banks from dealing in risky financial instruments on their own proprietary accounts... And third, abolish 'too big to fail.' If you're too big to fail, you're too big. Too big to fail is what I call no-fault capitalism."

I should clarify. I think it's fine for the commercial banks to diversify on the investment banking end. What I don't think is okay is that the FDIC insures them. You know, do what you want, but don't expect the government to have your back.

That's what I was talking about, I think.  Since Glass-Steagall was rolled back, it may no longer be legal to prop up banking institutions.  One of the lawyers should answer this question.

[clean]

it may no longer be legal to prop up banking institutions

The concept of 'too big to fail' is not really meant to protect the individual bank.  It is meant to support the banking system.  No one really depends on Citi Bank or B of A to exist, but they are too big to find an immediate buyer for or for the FDIC to pay off.  The collapse of these and others jeopardizes the entire financial system.
The argument that nothing should be allowed to become 'too big to fail' ignores other realities as well.  There may well be economies of scale that allow larger institutions to perform their functions cheaper than smaller ones and therefore benefit the entire system.  The whole may well work better with these big firms than with a lot of smaller ones. 
In the "hate Bof A" thread, many have suggested credit unions, but Spork pointed out that though he is a member of 2 credit unions, neither can do international transactions.  BofA does, and does them well and relatively inexpensively.
So dont let the "wouldnt it be nice" ideas crush the realities of the system.  Walmart may have killed the 'five and dime' stores, and 'wouldnt it be nice' if we could bring those days back by limiting Walmart's size, but the reality is that they have reduced the cost we pay... It wasnt Walmart that killed them, it was our change in patronedge... Walmart provided us the choice, and we exercised the choice that killed the five and dime.  Let us be careful about rolling back the clock.  Local banks may not be able to provide the level of loans that we want, or worse, because they can not diversify across the country are more likely to fail and endanger the system. 
So, Be careful what you ask for.  You might get it.

[prytania3]

Clean, I hear what you're saying. I remember when you were in a city not your own and had no way to get cash unless you brought it. How we managed I don't know.

But Citi and BofA existed as big entities before they had investment wings. In fact, many of BofA's problems arose due to the purchase (or forced purchase) of Merrill.

I like the ease of today's banking--for the most part, and hey, I shop at Wal-Mart, but I question the wisdom of gambling with investing depositors' money in weird financial instruments.

[quasihumanist]

it may no longer be legal to prop up banking institutions

The concept of 'too big to fail' is not really meant to protect the individual bank.  It is meant to support the banking system.  No one really depends on Citi Bank or B of A to exist, but they are too big to find an immediate buyer for or for the FDIC to pay off.  The collapse of these and others jeopardizes the entire financial system.
The argument that nothing should be allowed to become 'too big to fail' ignores other realities as well.  There may well be economies of scale that allow larger institutions to perform their functions cheaper than smaller ones and therefore benefit the entire system.  The whole may well work better with these big firms than with a lot of smaller ones. 
In the "hate Bof A" thread, many have suggested credit unions, but Spork pointed out that though he is a member of 2 credit unions, neither can do international transactions.  BofA does, and does them well and relatively inexpensively.
So dont let the "wouldnt it be nice" ideas crush the realities of the system.  Walmart may have killed the 'five and dime' stores, and 'wouldnt it be nice' if we could bring those days back by limiting Walmart's size, but the reality is that they have reduced the cost we pay... It wasnt Walmart that killed them, it was our change in patronedge... Walmart provided us the choice, and we exercised the choice that killed the five and dime.  Let us be careful about rolling back the clock.  Local banks may not be able to provide the level of loans that we want, or worse, because they can not diversify across the country are more likely to fail and endanger the system. 
So, Be careful what you ask for.  You might get it.

I think a good analogy here is insurance.

From an expected value standpoint, insurance is a bad deal.  You are likely to pay more in home insurance premiums than you ever claim.  But we still think it's a good idea to buy insurance

Limiting the size of banks is like an insurance policy for society.  We pay a small amount for it all the time in loss of efficiency, but we protect ourselves against (fairly unlikely) catastrophes.  That said, you don't really want to listen to the insurance salesman who calls you right after you've had a fire; they're probably capitalizing on your fear to get you to agree to a bad deal.

[mad_doctor]

it may no longer be legal to prop up banking institutions

The concept of 'too big to fail' is not really meant to protect the individual bank.  It is meant to support the banking system.  No one really depends on Citi Bank or B of A to exist, but they are too big to find an immediate buyer for or for the FDIC to pay off.  The collapse of these and others jeopardizes the entire financial system.
The argument that nothing should be allowed to become 'too big to fail' ignores other realities as well.  There may well be economies of scale that allow larger institutions to perform their functions cheaper than smaller ones and therefore benefit the entire system.  The whole may well work better with these big firms than with a lot of smaller ones. 
In the "hate Bof A" thread, many have suggested credit unions, but Spork pointed out that though he is a member of 2 credit unions, neither can do international transactions.  BofA does, and does them well and relatively inexpensively.
So dont let the "wouldnt it be nice" ideas crush the realities of the system.  Walmart may have killed the 'five and dime' stores, and 'wouldnt it be nice' if we could bring those days back by limiting Walmart's size, but the reality is that they have reduced the cost we pay... It wasnt Walmart that killed them, it was our change in patronedge... Walmart provided us the choice, and we exercised the choice that killed the five and dime.  Let us be careful about rolling back the clock.  Local banks may not be able to provide the level of loans that we want, or worse, because they can not diversify across the country are more likely to fail and endanger the system. 
So, Be careful what you ask for.  You might get it.

I think a good analogy here is insurance.

From an expected value standpoint, insurance is a bad deal.  You are likely to pay more in home insurance premiums than you ever claim.  But we still think it's a good idea to buy insurance

Limiting the size of banks is like an insurance policy for society.  We pay a small amount for it all the time in loss of efficiency, but we protect ourselves against (fairly unlikely) catastrophes.  That said, you don't really want to listen to the insurance salesman who calls you right after you've had a fire; they're probably capitalizing on your fear to get you to agree to a bad deal.

Perhaps, quasihumanist.  From an expected value standpoint, insurance is a bad deal.  If you have one house you are willing to pay for insurance because if you lose that one house you lose everything.  However, if you have 1,000 houses you might not buy insurance because if you lose/ badly damage a few, the cost of losing/ damaging those few is still less than the cost of insuring them all.

In the banking situaiton, would the same approach apply?  Maybe losing a few banks is still less costly than insuring them all from catastrophe, especialy considering how history teaches us that insuring financial institutions alters their risk-taking behavior in negative ways (e.g. why not take more risks since the government is telling us they have it all covered?).

[sibyl]

From an expected value standpoint, insurance is a bad deal.  If you have one house you are willing to pay for insurance because if you lose that one house you lose everything.  However, if you have 1,000 houses you might not buy insurance because if you lose/ badly damage a few, the cost of losing/ damaging those few is still less than the cost of insuring them all.

Excellent point.

In the banking situaiton, would the same approach apply?  Maybe losing a few banks is still less costly than insuring them all from catastrophe, especialy considering how history teaches us that insuring financial institutions alters their risk-taking behavior in negative ways (e.g. why not take more risks since the government is telling us they have it all covered?).

If we were talking only about the capital of the banks' respective shareholders, then you would be right.  But the FDIC insures deposits, not capital.  Letting a bank fail not only wipes out the owners' capital but also puts the FDIC, meaning the taxpayer, on the hook for the forfeited deposits of the depositors.  BoA's 2008 annual report says they had deposits of just under $900 billion (that's $900,000,000,000); even given that some of that amount is uninsured, it's still much cheaper to loan them $45 billion than to pay out twenty times that amount.

This is what pry was talking about.  Because deposits are insured by the FDIC, moral hazard comes into play:  the banks get to play in the casino without assuming the risk.  This is just like the guys who sold subprime mortgages; their companies were going to sell the loans, so they didn't care about ability to pay, only about generating sales.

[mad_doctor]

I think I agree with that, sibyl.  I can think of no reason why banks should be allowed to put depositor's accounts at risk.  The SEC already regulates certain securities the same way, why not checking and savings accounts?  If they want to play with investor money, that's another thing altogether, though.  Investors know the risks in advance, so they should be rewarded when things work and pay the price when they don't.  I think that was one of the good things about Glass-Steagall, how they separated securities/ investment and banking/ deposit operations.

[normative_]

I think I agree with that, sibyl.  I can think of no reason why banks should be allowed to put depositor's accounts at risk.

It won't just be Glass-Steagal II that's required, but mortgage lending practices, which GSII wouldn't cover. That's where sub-prime started, after all.

[spork]

Thanks for the compliment, but it was someone else who pointed out that it's difficult to do international transactions with a credit union.

I would like to see the SEC moved into the Justice Department and turned into an enforcement agency, staffed with both accountants and cops, rather than all the lawyers it has now.

I would also like to see moral hazard eliminated from the practices of financial firms and the individuals who work in them.  Recently I spoke with a lawyer who, in a side conversation, spoke about his efforts to refinance a mortgage.  If he pays his bills on time, he's shut out.  If he stops paying, he's rewarded, and so is the bank that holds the mortgage.

[mad_doctor]

I would like to see the SEC moved into the Justice Department and turned into an enforcement agency, staffed with both accountants and cops, rather than all the lawyers it has now.

I would also like to see moral hazard eliminated from the practices of financial firms and the individuals who work in them.  Recently I spoke with a lawyer who, in a side conversation, spoke about his efforts to refinance a mortgage.  If he pays his bills on time, he's shut out.  If he stops paying, he's rewarded, and so is the bank that holds the mortgage.

I am skeptical that this will fix anything, spork.  We are talking about the same SEC that had Bernie Madoff on the hook five or six times and let him go every time.  The problem here is that there is an enormous talent gap between the average government bureaucrat and their counterparts in industry.  I'd put my money on industry managers and executives every time.

Re: moral hazard...  if you know how to solve that problem you could be CEO of the biggest insurance companies and financial institutions out there.  I don't think there's a solution to it, but there are ways the problem can be minimized so it doesn't do too much damage.  Is there a way to make it less of a problem?  Perhaps.  It's a good thing to work on.

[mad_doctor]

I see that unemployment is creeping its way back up again, after holding steady for about two months.

[mad_doctor]

Bloomberg is now reporting that the government's annual "correction" to labor statistics to be issued in two days will report that they "underestimated" job losses by about 824,000 jobs.  This may put unemployment at or near 11%.  "Underestimated", indeed...  I think "manipulated" is more like it.

[i_heart_bulldogs]

Yeah... those numbers aren't all that trustworthy. A person can't even easily compare them over time, because the way the surveys are done changes over the years.

Anyhow, I'm sure it'll get spun as a reason for stimulus 2. Or whatever they're calling it these days. Stimulus 1 money isn't even half-way spent yet. Bananas.