This week, Senators Sherrod Brown (D-Ohio) and David Vitter (R-La.)published an op-ed in the New York Times that laid out the case for removing long-standing governmental support for America's biggest banks and corporate entities. Currently, taxpayers subsidize risk-taking by bankers at "megabanks," which have more than $500 billion in assets. Can anyone make an argument that the largest of banks face equal chances of going under and take equal risk as a bank in possession of less than $500 billion? Facts might get in the way of that opinion.
As Americans have seen in recent years, large corporate entities and the largest banks have compiled such massive lists of assets and such an enormous share of GDP that the U.S. government cannot allow them to fail, for to do so would wreak havoc upon the economy. This is the reality as supporters of megabanks see it. At this time, they have said, the economy is too precarious, and to take action that might compel the breaking up of big banks would be to turn an anemic economic recovery into another downward spiral, ending in recession-like conditions.
However, the crisis mentality of 2008-09 has passed. Continuing to subsidize failure on Wall Street is a mistake. This was a band-aid fix in a moment of crisis that must be replaced by a healthier and more long-term solution as soon as practicable. The larger and more irresponsible action would be to allow fewer than 10 banks to remain the most powerful actors in the American economy.
"Too Big to Fail" is dangerous to America's fiscal health and to public trust in institutions, and it distorts a market in which firms less politically connected and less wealthy conduct their potentially profitable, potentially ruinous business — that is, a market filled with capitalist, free-enterprise firms, something our largest banks may remember from their infancy. For conservatives like Senator Vitter, its anti-competition modus operandi may be the most grievous wrong of this policy. Under "Too Big to Fail," firms are rewarded for precisely the wrong reasons: quantity rather than quality, risk rather than profit, suppressing competition rather than enhancing it, taking on debt and too-low levels of equity, executives avoiding responsibility for illicit activities.
Increasing capital reserve requirements, as Sens. Brown and Vitter wish to do, would probably help. Larger banks should have larger capital reserves; this only makes sense. Proper capital reserves requirements must be held — the 15% reserves proposed by these senators makes far more sense than the low figures like 3.5% reserves held in the past, as they detail in their NYT article. When community banks hold higher reserve percentages than the largest banks in the global economy, something is greatly off balance.
As Sens. Brown and Vitter explain, perhaps the most important part of their plan is to prevent non-bank liabilities like derivatives from being transferred to federally insured banks, thus ending the taxpayer-funded subsidizing of excessive Wall Street risk. Under their plan, only commercial banking is to be backed by federal guarantees, separating the humdrum business of everyday banking from the riskier and more speculative aspects of investment banking. This is as it should be.
This is sound policy, and will make America's finances stronger in the long run. Americans should welcome this bipartisan proposal.