Too big to maintain
By George F. Will
Published: Saturday, Oct. 13, 2012, 8:59 p.m.
If in four weeks a President-elect Mitt Romney is seeking a Treasury secretary, he should look here, to Richard Fisher, president of the Federal Reserve Bank of Dallas. Candidate Romney can enhance his chance of having this choice to make by embracing a simple proposition from Fisher: Systemically important financial institutions (SIFIs), meaning too-big-to-fail (TBTF) banks, are “too dangerous to permit.”
Romney almost did this in the first debate when he said Dodd-Frank's designation of TBTF banks makes them “effectively guaranteed by the federal government” and constitutes “the biggest kiss that's been given to — to New York banks I've ever seen.” Fisher, who has a flair for rhetorical pungency, is more crisp:
There are 6,000 American banks but “half of the entire banking industry's assets” are concentrated in five institutions whose combined assets equate to almost 60 percent of GDP. And “the top 10 banks now account for 61 percent of commercial banking assets, substantially more than the 26 percent of only 20 years ago.”
The problems posed by “supersized and hypercomplex banks” might, Fisher says, require anti-obesity policies equivalent to “irreversible lap-band or gastric bypass surgery.” The land of TBTFs is “a perverse financial Lake Wobegon” where all crises are “exceptional,” justifying “unique” solutions that are the same, meaning bailouts. This incurs “the wrath of ordinary citizens and smaller entities that resent this favorable treatment, and we plant the seeds of social unrest.”
Fisher cites Andrew Haldane of the Bank of England, who calculates this: The assumption that certain banks have implicit TBTF status gives them preferential access to investment capital. In 2009, these silent subsidies enjoyed by TBTFs worldwide approached $2.3 trillion in value. Haldane notes a parallel between financial systems and epidemiological networks: Normal epidemiology involves “focusing preventive action on ‘super-spreaders' within the network to limit the potential for systemwide spread.”
Endorsing the axiom (attributed to Napoleon) that one should “never ascribe to malice that which is adequately explained by incompetence,” Fisher says TBTF banks “are sprawling and complex — so vast that their own management teams may not fully understand their own risk exposures, providing fertile ground for unintended ‘incompetence.'”
Fisher's rejoinder to those who impute “economies of scale” to such banks is that there also are “ dis economies of scale.” Fisher, among many others, believes the component parts of the biggest banks would be “worth more broken up than as a whole.”
At bottom, the TBTF phenomenon raises questions not merely about the financial system but about the nature of the American regime. These are Jacksonian questions, implicating issues Old Hickory raised in 1832 when vetoing the Second Bank of the United States: Should the government be complicit in protecting — and by doing so, enlarging — huge economic interests?
Capitalism — which is, as Milton Friedman tirelessly insisted, a profit and loss system — is subverted by TBTF, which socializes losses while leaving profits private. And which enhances the profits of those whose losses it socializes.
Too big to fail is a double moral disaster — it creates moral hazard by encouraging risky behavior and it delegitimizes capitalism by validating public cynicism about its risk-reward ratios.
Having tiptoed close to where Fisher stands, Romney still has time to remember Gen. Douglas MacArthur's axiom that in war all disasters can be explained by two words: “Too late.”
George F. Will is a columnist for The Washington Post and Newsweek.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Penguins notebook: Popularity with ladies brings test event to Consol
- Embassy bombings trial might use 2 juries, judge says
- Buffalo Township real estate taxes to rise by almost 30%
- Pirates claim 3 pitchers in minor league Rule 5 draft
- Kovacevic: Why give credence to Heisman?
- Police release video of possible suspect in South Side assault
- Motivated quarterback Roethlisberger fights to prop up Steelers
- Garden Theater developer says plans changing for block’s buildings
- ‘Worse than a dog’: North Korea executes Kim Jong Un’s uncle
- No one injured in clothes dryer explosion
- Pirates agree with Barmes on 1-year deal