Uncle Joe Vs. “Too Big to Fail”

Devon, PA.  Outside of a few magazines and other fora on the conservative and collectivist fringe, one seldom hears the opinion that the banking crisis of 2008 was brought about chiefly, not to say exclusively, by the kinds of teratological corporate structure that came into being once the Glass-Stegall act of 1933 was repealed.  Chronicles has addressed this matter repeatedly, but what a pleasure it is to see the opinion page of the Wall Street Journal finally get in the game (sort of).  From Tom C. Frost’s excellent editorial that is at once, and in the best sense, Jayber Crow, Wilhelm Röpke, and Frank Capra:

In the early 1950s, when I was a young college graduate and a new employee of the Frost Bank, my great-Uncle Joe Frost, then CEO, told me that the very first goal we had was to return the deposits we received from customers. Our obligation was to take care of the community’s liquid assets and manage them safely so others could use them (via loans) to grow.

Frost Bank was not big enough to be saved by the government, Uncle Joe told me at the time, so we would always need to maintain strong liquidity, safe assets and adequate capital. I was impressed that making money was not high on his list of priorities, but he implied that profits would come if we observed sound banking principles.

When we look at banking in the United States today, Uncle Joe’s values seem so long ago and far away. The industry is now dominated by a few large banks.

In 1970, according to data from the Federal Reserve Bank of Dallas, the five largest U.S. institutions owned 17% of banking industry assets; in 2010 that share was 52%. Their business has expanded well beyond the role as steward of the community’s assets into riskier endeavors that chase supersized returns.

As the financial crisis of 2008 showed, the very diversification, structure and size of most of our largest banks put the community’s assets at tremendous risk. They had become “too big to fail,” and the government—really the American taxpayers—had no choice but to keep their colossal mistakes from bringing down the economy.

But as Harvey Rosenblum, the Dallas Federal Reserve Bank’s executive vice president and director of research, wrote last year, “These rescues have penalized equity holders while protecting bondholders and, to a lesser extent, bank managers.” In other words, by protecting people from the consequences of their errors, the bailouts raised the risk that the same errors will be made in the future.

There are many good proposals for minimizing, if not entirely eliminating, the likelihood of another “too big to fail” crisis of the sort we faced in 2008. Perhaps most prominent among them is the recommendation that we require banks to hold additional capital to protect themselves (and the rest of us) from loans and investments gone sour.

But even these recommendations would allow the big banks to keep their traditional FDIC-insured deposits, alongside their investment enterprises within the parent company. I suggest that we divide the two functions into separately owned, managed and regulated entities. That’s the only way we can ensure that their riskier businesses don’t undermine the insured deposits that are the foundation of a stable and healthy economy.

 

6 comments on this post.
  1. Russell Arben Fox:

    James,

    Outside of a few conservative magazines, one seldom heres the opinion that the banking crisis of 2008 was brought about chiefly, not to say exclusively, by the kinds of teratological corporate structure that came into being once the Glass-Stegall act of 1933 was repealed.

    I agree with you; the Wall Street Journal editorial is excellent. However, your opening sentence should read, “Outside of a few magazines, one seldom hears conservatives voice the opinion that the banking crisis of 2008…” Because amongst most progressive liberal and nearly all social democratic outlets and voices, pointing to the repeal of Glass-Stegall and other banking regulations as a cause of the 2008 meltdown has been commonplace for years. It’s one of the central claims of the film “Inside Job,” for example.

  2. James Matthew Wilson:

    Duly altered, Foxy. Thanks.

  3. randir25:

    Too big to fail =too big to sucseed with out government intervention =too big to exist. The trinumvernt(sp) of Big Government, Big Business, Big Finance. We have been shackled by debt, to wage jobs, and regulated out of starting our own. This is the Servile State

  4. D.W. Sabin:

    Ohhh, the big bad banks. The fact of the matter is that our government went way out on a leverage branch and the fat cats were only too happy to be backstopped. The government was entirely complicit in the dumb-headed speculation. The Fat cats are still up to their old tricks and this government , a government which doesn’t give a damn about the value of a dollar is fully, make that willfully, obliging them while maintaining a string quartet for doleful display in the background as the need may arise..

    The tepid performance of the initial public offering of Facebook would seem to display the fact that the public still thinks “talk is cheap” but perhaps it is simply a matter of too many people shorting the phenomenon.

    Whatever the case may be, the fiat economy aint had its comeuppance yet, it still thinks talk is expensive.

  5. John Haas:

    FDIC. Where does the Constitution mandate that?

  6. JonF311:

    Glass-Stegall repeal is iconic of the loss of government oversight– but the repeal of the act contributed nothing toward the 2008 crisis which would have gone down much the same had it still been in place.
    And recall that well before the repeal of GS, c. 1980 Citibank got into trouble and had to be bailed out by the government then.

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