Are bankers greedy? Are they too big to fail? Is it a mistake to allow banks to combine deposit and investment banking? Yes, yes, and yes. That's the conventional wisdom today. And maybe the conventioneers have a point.
But Stephens is, in my view, missing the point. The reason that banks went belly up in 2008 was that the government was forcing them to goose their real estate loans. Not to mention that the inflationary anti-recessionary policy of the early 2000s encouraged borrowers to over-leverage. The activities of Fannie Mae and Freddie Mac created a whole class of mortgages issued to people that couldn't afford any decline in asset prices. Government was behind that, and a big-time political hack, James A. Johnson, campaign manager of the Mondale presidential campaign.
If we compare 2008 and 1907 we notice an important factor. In 1907 Morgan regarded himself as the man in charge of saving the financial system. He reckoned it was his job to fix the crash, and his job to bail out the firms teetering on the edge of bankruptcy. In 2008 it was the government's job to do the bailout. The result of the 1907 bailout was a restoration of the gold standard at the old parity of $20.67 per ounce. The result of the 2008 bailout has been a significant devaluation of the dollar that may not yet be finished.
The big problem with finance is not greedy bankers and too big to fail. The problem is that government has taken over the financial system and has ruthlessly exploited it. With government in control the credit system is much more leveraged than in the old days. Big banks understand that it is government that runs the system, government that sets the rules, and government that owns it.
If we want to get a financial system that is solid and stable we need to get the government out of it. Well, not entirely because we still need the government to be able to borrow big time when we have a big time war. But the lesson of the 20th century is that government is lousy at guarding the financial system, because it cannot resist using the financial system as a piggy-bank.
There has to be a better way.
But all these cliches miss the main point. After all, why was it that in the Crash of 1907 the biggest, greediest banker of them all, J.P. Morgan, ran the bailout and used his own money to bail out faltering corporations? While in the Crash of 2008 it was the big bankers that needed bailouts with the government's TARP program?
Was Morgan greedier than the banker CEOs of 2008? Were Chase Manhattan and J.P. Morgan bigger, relative to the market, in 2008 than in 1907? And what about Morgan? He was all over the place in investment banking as the chap that cleaned up the many railroad bankruptcies of the late 19th century. And did the government's Federal Reserve System do any better in 2008 than Morgan in 1907 in righting the financial ship?
This is what we need to keep in mind when we evaluate, e.g., Warren Stephens' article in the Wall Street Journal about too-big-to-fail: "How Big Banks Threaten Our Economy." Warren Stephens comes from the Stephens banking family of Little Rock, AR. You'll remember the name from the Clinton era. Says he:
Five institutions control 50% of the deposits in this country. They are definitely too big to fail. In a capitalist economy, there should be no such entity. We should promote competition and innovation in the financial industry, not protect an oligopoly.He wants to limit banks to 5% of deposits, and break up banks currently over the 5% limit, keep $250,000 deposit insurance, and separate investment and deposit banking. And no more bailouts. Mr. Conventional Wisdom.
But Stephens is, in my view, missing the point. The reason that banks went belly up in 2008 was that the government was forcing them to goose their real estate loans. Not to mention that the inflationary anti-recessionary policy of the early 2000s encouraged borrowers to over-leverage. The activities of Fannie Mae and Freddie Mac created a whole class of mortgages issued to people that couldn't afford any decline in asset prices. Government was behind that, and a big-time political hack, James A. Johnson, campaign manager of the Mondale presidential campaign.
If we compare 2008 and 1907 we notice an important factor. In 1907 Morgan regarded himself as the man in charge of saving the financial system. He reckoned it was his job to fix the crash, and his job to bail out the firms teetering on the edge of bankruptcy. In 2008 it was the government's job to do the bailout. The result of the 1907 bailout was a restoration of the gold standard at the old parity of $20.67 per ounce. The result of the 2008 bailout has been a significant devaluation of the dollar that may not yet be finished.
The big problem with finance is not greedy bankers and too big to fail. The problem is that government has taken over the financial system and has ruthlessly exploited it. With government in control the credit system is much more leveraged than in the old days. Big banks understand that it is government that runs the system, government that sets the rules, and government that owns it.
If we want to get a financial system that is solid and stable we need to get the government out of it. Well, not entirely because we still need the government to be able to borrow big time when we have a big time war. But the lesson of the 20th century is that government is lousy at guarding the financial system, because it cannot resist using the financial system as a piggy-bank.
There has to be a better way.
No comments:
Post a Comment