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Economic Outlook: Too big reconsidered
Whatever happened to the central theme of the financial crisis of 2008 that called for a portable solution to firms that were “too big to fail”?
“Too big to fail,” was the catch phrase for a moral dilemma, which was the recognition that some of the country’s banks were so big, their demise could trigger a domino effect through the financial system, prompting failure at one bank and then another.
The idea was to keep poor, innocent taxpayers from getting stuck with the bill for the massive bailout that went — unfairly, it was assumed — to the fat cat bankers whose gambling habits had created the crisis in the first place.
Imagine the size of Bank of America in 2006 — beyond enormous. Imagine the size of Citibank, Goldman Sachs, Wachovia, Merrill Lynch, Bear Stearns.
They were bigger than big. The collapse of one threatened the entire financial system from New York to Fleet Street to Beijing.
By the end of the financial crisis, however, Bank of America had absorbed Merrill Lynch. JP Morgan Chase swallowed Bear Strearns and, if that wasn’t enough, a few months later, in September 2008, it bought Washington Mutual, which at the time was the largest bank failure in U.S. history.
Wells Fargo bought Wachovia — a $15.1 billion purchase at a fire sale price.
As a reminder, “too big to fail” referred to these monster banks before they went on a crisis-prompted merger spree.
So what now? Or what’s next?
Gaining some steam in Washington is the possibility of tying non-deposit liabilities to a percentage of the gross domestic product, a formula recently suggested by Federal Reserve bank Gov. Daniel Tarullo in a recent speech.
In a quick rundown of the pertinent issues, one camp, Republicans mainly, believe the Dodd-Frank overhaul bill was an effort to hold down bank size with pins and needles and far too many of them. In the entire bill, there is no simple, enforceable rule that limits the size of the nation’s banks.
On the other hand, some say regulating bank size with one overriding rule would be ineffective. There are too many places where that strategy could fail. That dam, in other words, could start springing leaks all over the place and a mess of good intentions, in other words the Dodd-Frank bill, is the way to manage that.
Of course, if non-deposit liabilities were tied to the GDP, the specific percentage would be critical. Can Washington lawmakers actually withstand the predictable banking lobby assault and set a percentage that would force the behemoths to shrink? Or would lawmakers simply set a limit on future growth, which would leave the system with frightfully large banks, given they were considered “too big to fail,” before the financial crisis and now they are much, much bigger?
In international markets Tuesday, the Nikkei 225 index in Japan gained 1.44 percent while the Shanghai composite index in China rose less than 0.01 percent. The Hang Seng index in Hong Kong added 0.27 percent while the Sensex in India shed 0.73 percent.
The S&P/ASX 200 in Australia gained 0.18 percent.
In midday trading in Europe, the FTSE 100 index in Britain climbed 0.93 percent while the DAX 30 in Germany jumped 1.33 percent. The CAC 40 in France rose 1.39 percent while the Stoxx Europe 600 gained 0.9 percent.
Copyright 2012 by United Press International