Too Big to Fail Banks: Can Congress Get Rid Of Them?


With the usual time lag between events and political responses, bipartisan efforts and political will are ramping up to end what both conservatives and liberals consider horrible public policy: banks that are "Too Big to Fail." The question becomes one of whether Congress will take action.

Now that several years have passed and, presumably, tempers have cooled about Too Big to Fail (TBTF) and the crisis mentality of having to do something right away has been alleviated, members of both parties are working constructively to consider ways of ending this travesty of free enterprise. Senators Brown (D-Ohio) and Vitter (R-La.), for example, have worked together on a bill to move this country away from further institutionalizing this policy to deaden competition amongst bankers and enshrine the top 20 or so largest American banks — gargantuan banks is a more accurate term for the biggest — on top of the world. Their plan is only one of several to remove TBTF from the American lexicon except as a historical reference, but it certainly deserves and demands publicity.  

In the House, Chairman Hensarling (R-Texas) of the Financial Services Committee will likely assist in some kind of effort to avoid making TBTF in the late 2000s a precedent for future responses to financial crises. His approach is here. He reiterates that being pro-market is not the same as being pro-business.

Whether or not we should place a select number of bankers at the center of our economy and thus become dependent on their expert handling of financial matters is a matter of personal opinion, I suppose, but only if the lessons of the Great Recession are mostly lost on you. Conservatives should be heartened by the long list of conservative luminaries who think TBTF is awful in terms of free-market growth and creating low barriers to entry for smaller firms. Likewise, liberals should take note of the long list of leaders on their side of the partisan aisle who believe that ending TBTF would be a great step forward for America. All sides should always keep in mind any "crony capitalism" (as it is so called by Dallas Fed president Richard Fisher) or abuse of power that is permitted to take place.

It is a truism in American politics that you can tell a great deal about a bill by who supports it. You can really tell what a bill has the potential to do by which groups fight against it. Reactions to the Brown-Vitter bill might consist of banking executives at Goldman Sachs getting a headache; but then, it's supposed to do that, isn't it? This is a bill promising to restore competitiveness to a banking industry overly captivated by the largest banks and would likely confine its overpaid executives to smaller profit margins — why would they welcome this bill?

It is possible that bankers at TBTF institutions will never overextend their lines of credit or enrich themselves at the expense of their clients. It is possible that bankers at the top 20 largest banks in America are fundamentally interested in America's financial well-being and consider it more important than their own. It is possible they are entirely virtuous creatures whose morals would never allow them to use other peoples' money like it's only so much fake money in the game of Monopoly.  

However, consider what else is possible. Consider which is more likely: someone in a position of power choosing morally correct behavior for the greater good or cashing in on his or her (mostly his) ability to personally pocket millions of dollars and in all likelihood escape without criminal prosecution.

This TBTF policy has the potential for all too often rewarding mismanagement and faulty bookkeeping on the part of executives at the top 20 largest banks in America. It has the potential to reward bankers for intentionally overextending their institutions, over-lending, making excessively risky bets, having insufficient reserves of funds and hugely lopsided ratios of debts to assets, granting loans to borrowers who don't qualify for them, and to perpetuate the trend of increasing the share of the whole U.S. economy that consists of unproductive financial services — essentially, to a very large extent, what caused the Great Recession.

In the spirit of the ideologically-divided news culture in which we live, choose your messenger:

If a liberal source would convince you, here it is from the American Prospect.

If conservative voices resonate more with you, the case is made rather well by George Will of the Washington Post, and echoed by the Washington Times.

Ending TBTF will likely entail the breaking up of some banks, which many see as being problematic. Yet it remains true that allowing current policy to run its course is like ignoring recent history and knowingly asking for future financial trouble.