Apr292015

Bank bashing must continue until the too-big-to-fail banks crumble

Too–big-to-fail banks should be bashed continually until the weight of political discontent forces their breakup.

The bailouts of the too-big-too-fail banks irritated me (and many others). I would have far preferred to see the architects of the financial catastrophe of 2008 lose their jobs, their wealth, their social status, and be demonized for their atrocious behavior. Instead, we bailed them out, allowed them to keep their ill-gotten gains, and put them back in charge of our financial system. It wasn’t right.

“Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves.” — Andrew Jackson

Rather than killing the evil banks as Andrew Jackson did, we bailed them out. This flawed policy was sold to Americans as a necessary evil; ordinary people were “saved” by bailing out the 1%. Since there is no way to test alternate realities, we have no choice but to accept their contention.citi-bank-card--16509

Personally, I think they’re full of shit.

We had other policy options, including nationalizing the banking system. Sweden did it, and it worked. Iceland did it, and it worked. Our financial elites prevented this cleansing from occurring, and now the bad debts still reverberate through our financial system. We have banks propping up home prices through can-kicking loan modifications in an attempt to recover on their bad loans, and today’s homebuyers have to pay higher prices in order to bail them out. How does that help the little guy?

Realistically, the only way this situation changes is to keep the pressure on the financial elites. Ever since the passage of Dodd-Frank, the political left has been on the defensive. This is a mistake. The bank bashing must continue until the too-big-to-fail banks crumble to dust.

It’s time to lay off the bank-bashing

Mark Zandi, Posted: Sunday, April 26, 2015

The nation’s big banks have no friends. The political parties don’t agree on much, but they agree that the big banks are a big problem. Bank-bashing is in vogue.

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This has become counterproductive and should stop.

Bullshit! How many billion must the TBTF banks pay for their malfeasance? Not nearly enough.

There is no argument that the banks, and the financial system more broadly, badly needed reform after the housing bubble burst. When millions of faulty mortgage loans defaulted, the system was brought to its knees. Without a taxpayer bailout, it would have collapsed, ensuring economic depression.

Bullshit! Bankster Bailouts Did NOT Save Us from the Second Great Depression. The only thing bailouts accomplished was to stop a group of greedy and ignorant fools from experiencing the consequences of their actions.

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The most important reform has been to make it much more difficult to make bad loans. The subprime mortgage loans at the heart of the financial collapse are now all but impossible to make.

Reform also requires banks to hold a lot more capital – the financial cushion banks need to absorb the losses they suffer if loans they make default. Banks fail if their bad loans are greater than their capital.

Today, the banks have more capital than they have ever had, enough to withstand something much worse than the housing bust. Their capital cushion is also still growing, particularly for the biggest banks.

And regulators now have more tools to deal with troubled financial institutions that run out of capital. Regulators were unsure of how they should deal with failing institutions during the crisis. Or whether they even had the authority to deal with those that weren’t banks.

The fact that legislators made some progress — progress aggressively resisted by the banks — does nothing to warrant pardoning the banks for their bad behavior. The arguments he makes are disingenuous at best, dangerously foolish at worst.

Indeed, most of the financial institutions that faltered badly during the crisis weren’t banks at all. Lehman Bros. and Bear Stearns were more like hedge funds, Fannie Mae and Freddie Mac are behemoth mortgage companies, Countrywide was a nonbank mortgage lender, and AIG is an insurance company.

They all earned their special place in hell.

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Is he really arguing the banks were any less evil?

At the behest of regulators, the nation’s biggest banks took over many of these failing institutions. The hope was that if the banks took them over, regulators, and by extension taxpayers, wouldn’t have to. Ironically, these banks are now getting bashed mostly for the bad lending by the institutions they took over.

The big banks were the good guys saving America, right?

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Yes, the banks made plenty of mistakes, and reform was necessary, but it is time to stop the bank-bashing. It is counterproductive, as banks remain reticent to provide the credit the economy needs to perform well.

So the banks aren’t making more loans because the public keeps bashing them? Is he serious?

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The banks aren’t making more loans because there aren’t many worthy customers, not because people bash them.

This is clearest with mortgage loans. Potential first-time home buyers, in particular, are having a tough time qualifying for a loan. First-timers generally have lower incomes and less for a down payment, and are more likely to stumble on their loan payments.

Yes, it is clear from the composition of the first-time homebuyer pool that not enough people have the character, capacity, and collateral to qualify for a loan. And what’s clear from the housing bubble and bust is that lenders shouldn’t provide loans to borrowers without character, capacity, and collateral.Fatcat-Banker

Banks, nervous about getting hammered if they make a loan to someone who ultimately has a problem, have become overly cautious.

Many would-be home buyers who could make timely payments can’t get a loan. Yet housing – and thus the economy – won’t kick into full gear without more first-time home buying.

Back when banks used to lose money on bad loans, they were cautious about who they loaned money to. It wasn’t until the era of securitization that lenders abandoned sound underwriting in favor of volume. Obviously, Mark Zandi proposes going back to the lax standards of the bubble era when lenders weren’t responsible for the bad loans they make.

Bank-bashing also threatens to manifest itself in regulators requiring the banks to hold too much capital. Think of it this way: It makes sense to require that homes be built so they don’t get flooded more than once every hundred years, but it makes little sense to require that homes be built to withstand a thousand-year flood. That would be prohibitively costly.

The same principal applies to bank capital. We want banks to hold enough capital so that they could withstand a financial crisis like the one we just went through, but much more than that and it becomes too costly. Banks will charge onerously high interest rates and make it too difficult to get a loan.

So now Zandi is suggesting we stop pressuring regulators to apply reasonable capital ratio standards to financial institutions because it eats into their profits? Really?

Bullshit! We need to apply more pressure. The financial elites already circumvented the Dodd-Frank requirements for holding 5% risk retention on risky loans, so now they want to roll back capital requirements as well?

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I give him credit for the courage to put such preposterous ideas into print. He should be embarrassed, but since Mark Zandi is wrong so often, most people will likely just ignore him.

Requiring the banks to hold too much capital also means that more credit will be provided by the shadow banking system. This part of the financial system is made up of a mélange of non-bank financial institutions and global investors.

There is nothing wrong with the shadow system per se, but as its name implies, what goes on in the shadow system can be opaque. Moreover, there is a lot more risk-taking in the shadow system and it is only lightly regulated. Parts of it are like the Wild West of the financial system, where almost anything goes and the regulatory sheriff can’t do much.

The banks have an overflow of capital and appear on safer financial ground, but the shadow system and thus the entire financial system probably isn’t.

So if we don’t let the banks be foolish and irresponsible, the money will simply flow to others who will be foolish and irresponsible? Really?

I guess we better let the too-big-to-fail banks do whatever they want.

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Most bank-bashers also advocate breaking up the big banks with the goal of ending too-big-to-fail. That is, no bank should be so large that it would require taxpayer support if it faltered or the entire financial system would be at risk.

Yes, we do.

This is a laudable goal, but it should be considered against the potentially considerable benefits big banks provide. In a global economy, big banks supply the financial services required by large multinational corporations. Big banks also have the heft needed to make financial markets work efficiently. Stock, bond, foreign-exchange, and commodity prices would likely be more volatile without the liquidity big banks provide.

So we should keep the too-big-to-fail banks around — exposing taxpayers to enormous risks — because they somehow make financial markets more efficient?

It is also worth considering that in nearly all other countries, the financial system is dominated by a few too-big-to-fail financial institutions. These foreign institutions are already big players in our financial system, and could become bigger without the counterweight provided by large U.S. banks.

Since other countries allow this evil, we should too, right?

It is politically expedient to beat up on the big banks. That was perhaps understandable in the immediate aftermath of the financial crisis. It no longer is.

No. It’s even more understandable today. We haven’t rid the country of the evil of too-big-to-fail, and unless we keep the pressure on, the financial elites will destroy the wealth of another generation for their own personal gain.

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