Yesterday, Mr Obama was on the news. He was giving a speech in what appeared to be a town meeting like venue. During his speech he spoke to the need for the government to rescue banks. To make his point he noted that if the local bank failed, the FDIC would step in guarantee the deposits (this isn't strictly true but that's another issue) clean things up and sell the bank so that the depositors would not be especially bothered (that's also not true as anyone who has ever had money in a failed bank can testify, but that's also another issue). Mr Obama then went on to note that when a big bank such as Citi, Band of America, or Wells Fargo got in trouble it was a much different matter. He noted that such large institutions control some 70% of the US financial services market. Consequently, they are to big to be allowed to fail.
Mr Obama is both right and wrong in this matter in my opinion.
First, I'd note as someone that from time to time has studied these and other banks for a living, that they in fact control rather more than 70% of the US banking marketplace. Depending on what one considers they may represent up to 90%! Mr Obama significantly underestimated the market share of these institutions.
Second, I agree with Mr Obama. Any institution that controls even 10% of a nations banking market is, indeed, to big to fail.
Third, Mr Obama entirely missed the really important issue. Should any single financial entity be allowed to control so large a share of a countries financial markets that they are to large to fail? A close related question is, should decisions about a countries financial markets be in the hands of a small (in the US read less than a dozen) number of CEOs?
My answer to both questions is a resounding no. Further, I'd note that not so long ago in the US it was not legal for banks to be remotely as large as they have become in the last dozen years. Laws that were passed after the depression to avoid just such concentration of financial control were changed some years ago so that a handful of large banks, read CitiBank, Band of America, Wells Fargo, WAMU, and a handful of others could engage in nationwide banking. Subsequently, these large institutions went on a merger binge and became the superlarge institutions they are today. In addition, they became, as Mr Obama notes, 'to large to fail'.
In the US, banking is part of the free market. While that's not true in all democracies a free market banking system has in general worked reasonably well. We have banking crisis of one sort or another every dozen or so years generally driven by greed overcoming common sense and inadequate regulation. But we survive them and life goes on. But while banking is a free market activity, it is not 'free market' in the sense that say the local pizza shop is. Banking involves the nation's well being and is, quite appropriately, subject to significant state and federal regulation.
Perhaps it's time to restore appropriate banking regulation. To cause banks that are 'to large to fail' to be split up and required to do business in a marketplace where if they make bad decisions and fail 'we the people' in the form of the federal government spending tax dolars don't bail them out and don't pay bonuses to executives who are clearly incompetent.
Just a thought really. Just some common sense.
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