Rather than do this willy-nilly, would it not be more sensible to articulate a blueprint for how banking and finance will, going forward, be organized and regulated so as not to allow a repetition of the last few years' harmful practices?
I outlined some thoughts on this topic in this recent post. In that post, my remarks were geared toward the design of a safe, nationalized core banking sector in the US.
There is a concept that I have only heard John Bogle, founder of the Vanguard Group, espouse. Within it are the seeds of both the recent financial markets crisis and its solution.
Bogle has observed that, to use my words, because I don't have his exact quote,
'Banking and finance cannot, in aggregate, over time, grow faster than the economy of which they are a part. Banking doesn't provide sustained, increasing added value over time beyond the growth rate of the economy.'
When (dumb) banking executives, and/or politicians, attempt to grow parts of the financial sector too fast, risk is typically assumed out of prior or reasonable proportions.
Further, that risk is almost always underpriced. Especially because when the risk begins to rise, it rises so far and so fast that almost no prior pricing could have anticipated it, and, if it had, it would have been prohibitively expensive.
Why not redesign the core banking sector to be that part of our nation's finance which is to remain ultra-safe, with little or no risk taken, and no excess profitability, due to risk, allowed.
With technology and market concentration of banking, we have probably crossed an important Rubicon years ago. Ben Bernanke's answer to a question at yesterday's lunch at the Economic Club of New York, where he spoke, did not, to me, seem to acknowledge the obvious.
Last November, I wrote this post upon seeing a CNBC interview with perpetual doomsayer and former Salomon Brothers economist, Henry Kaufman, on his 80th birthday. In that post, I referenced this post, written two weeks earlier. In it, I contended,
"As recently as 1996, when I was Research Director for then-independent financial services consultant Oliver, Wyman & Co., which is now the financial consulting division of Mercer Management Consulting, there were five independent credit card issuers (First Card, MBNA, Advanta, and two others whose names now elude me), a number of mutual fund companies, and several mortgage banks (Countrywide & Golden West, to name two), and retail discount brokers (Schwab, Quick & Reilly).
In the decade since, commercial banks, contrary to accepted financial theory that an investor can diversify his/her own holdings better than a company can do it for him/her, sought these types of businesses to attenuate variation in their reported earnings, as well as pursue the mythical 'cross sell' opportunity amongst various retail businesses.
The results have not been impressive, as I noted in this post two months ago.
The price that US consumers have paid for financial services innovation and cost reductions over the past five decades has been the concentration of many financial services into fewer, larger entities, which concentration has increased risks to the banking and credit system.
Failures such as First Pennsylvania Bank, Continental Bank, SeaFirst, and numerous banks weakened by loan losses, which were acquired during the 1980s and '90s, such as BofA, Shawmut, First Interstate, and a clutch of Texas energy-lending dependent banks, provide examples.
So, in conclusion, I'm not at all certain that Kaufman's warnings are even correct. Most of our financial system's largest failures have been committed by non-diversified banks or financial services companies.
In fact, one of the few benefits, besides technological innovation, that recent consolidation affords is larger capital bases with which to absorb the effects of mistakes.
Looking back over nearly 50 years of US financial system innovation and evolution, I think one could fairly say that the benefits we have enjoyed have far outweighed the realized risks that have accompanied such changes."
At this point, I think Bernanke would do well to accept that the speed with which financial markets can process data and trade, and, thus, the degree to which they have relied on large investments in information technology systems and software have been a significant factor in the concentration of financial assets in just a handful of large US banks.
This will not change now. So, yes, I believe, contrary to Bernanke's assertion, that each of those banks into which Treasury has invested some of its initial $250B is, indeed, 'too big to fail.'
Thus, the point of the title of this post, by combining historical trends in banking with John Bogle's observation.
Real human behavior is for CEOs of publicly-held companies to seek growth. Growth in revenues, profits, assets, market value and total returns to shareholders.
When banking and finance companies do this, they tend, in the aggregate, to increase systemic risk, if they succeed in growing faster than the long run growth rate of our economy.
What happens next is what has occurred in our financial system since Congress passed the CRA and pushed Fannie and Freddie to pass through subprime mortgages lent to low-income homeowners.
One way to remedy this is to take the largest portion of the sector, i.e., core banking functions, and nationalize the heck out of it with both choking regulation and government (societal) ownership.
These are the key elements of our money and banking system which, in aggregate, are, indeed, 'too important- and big- to fail.'
The remainder of the finance sector- loan companies, investment banks, hedge and mutual fund companies, etc., may still exist. And will, on balance, be too small to have their failures threaten the entire US banking and financial system.
But our current financial situation begs us to observe and acknowledge the obvious. Banking behavior as usual will only return us, eventually, to this same point.
So let's reimpose Glass-Steagall, de facto. And nationalize the ownership of our large, core banks and banking functions. Finally, regulate those nationalized banking functions to not lose money, but to provide strictly-followed lending guidelines to provide credit to the credit worthy.
Anything less only invites further abuse of risk-taking in banking and finance sometime down the road. It happened in 1929, but was avoided by decent, if not perfect, regulation, until the late 1990s, when it happened again.
Without meaningful, serious separation of core banking from risk-taking finance, we'll get there again- eventually.
No comments:
Post a Comment