Archive for April, 2010

Too big

22 April 2010

The NYT has a good piece on the prospects for federal breakups of the big banks.  It’s not part of the financial reform bill that the Senate Finance Committee just passed, or the one the House passed earlier, but a group of Democratic senators including Sherrod Brown of Ohio and Ted Kaufman of Delaware just introduced such a measure.

Some numbers to sink your teeth into, from the article:

The banking industry has become much more concentrated as it has grown in recent years. In 1995, the assets of the six largest banks were equivalent to 17 percent of G.D.P.; now they amount to 63 percent of G.D.P. Meanwhile, the share of all banking industry assets held by the top 10 banks rose to 58 percent last year, from 44 percent in 2000 and 24 percent in 1990.

UPDATE: Simon Johnson likes the Kaufman-Brown bill and discusses it at length here.  A longer post here about the specious arguments by two senators and Larry Summers in favor of preserving the size of the big banks.

Mitch McConnell voted for the bank bailout

20 April 2010

The Senate Minority Leader has been talking tough lately about how the best way to reform the financial sector is with just three words:  No. More. Bailouts.

Two main drawbacks to this Three Word Game:

(1) The collateral damage to the rest of the economy, notably the credit markets,  is likely to be huge if financial behemoths fail;

(2) Politicians and policy makers know that and will tend to choose a bailout over colossal damage to the economy, no matter what they say.

One such politician is the senior Republican senator from Kentucky, who voted for the financial bailout of 2008, along with 74 other senators.  (The party breakdown was 39-9 in favor among Democrats, 34-15 among Republicans.)

Senator McConnell, I call bullshit.

Exiled From Main St. / Start Breaking Up

18 April 2010

Thomas Hoenig, president of the Kansas City Fed and one of the most incisive critics of the “too big to fail” policy, has an op-ed in today’s NYT about the current financial reform bill before Congress.  He says it does far too little to end “too big to fail” — while it sets up a mechanism for big failing financial institutions to be put under FDIC receivership, those financial institutions would still have the political clout to snag a bailout instead.

This may be true, but it seems to be a drawback in any financial reform bill that doesn’t call for the biggest financial institutions to be broken up into smaller ones that are not too big to fail, i.e., which can go bankrupt without significant systemic risk to the economy.  Koenig has spoken elsewhere on the need to break up the biggest banks.  It’s a position that finds favor among many liberal economists,including James Kwak of the Baseline Scenario (see previous link).  Rep. Paul Kanjorski of Scranton, PA has proposed an amendment to give the government power to preemptively break up any financial institution whose failure would impose giant costs on the U.S. economy, but the Senate Banking Committee apparently has nothing like that on the table yet.  Alas, the political clout of the big banks may well be enough to make bank size restrictions a non-starter in the Senate.  Simon Johnson of The Baseline Scenario says much the same thing here.

Hoenig says that another provision of the bill actually makes things worse by narrowing the Fed’s supervisory role to just the nation’s 12 largest banks, most of which are headquartered in NYC.  I do not know what the logic of this provision is, and Hoenig doesn’t say; maybe the idea is for the other banks to be supervised by the FDIC and/or other agencies instead.  Whatever it is, Hoenig thinks the Fed needs to give just as much attention to the other 6,700 as to the top 12.  As he points out, that would seem to be the whole point of having 11 regional Fed banks besides the one in New York.

UPDATE:  Simon Johnson puts it a lot more plainly right here.  For the record, Paul Krugman has his doubts that breaking up the banks would help much — see the last three paragraphs of this recent column.  I’m with Simon Johnson here.  By all means, crack down on fraudulent finance at institutions large and small, but I don’t see how you limit the power of the big banks without limiting their size, too.

Got a job

2 April 2010

The economy added 162,000 jobs in March, which is the most in three years, i.e., the most since before the recession or the financial crisis began.  Something to find a small measure of comfort in — small because the unemployment rate still stands at 9.7%.  But this is a start.

UPDATE, 5 APRIL 2010:  James Hamilton of Econbrowser thinks this is very, very good news, along with such other glimmers of light as the upward trend in manufacturing, as seen in the best reading of the Institute for Supply Management’s “PMI” indicator since 2004.  (What is PMI, you and I ask?  It is an acronym that no longer stands for anything in particular.  It used to stand for Purchasing Managers Index; now it combines multiple measures, including new orders, inventory levels, and labor-market conditions.)