After nominating (though not publicly) several Banks and institutions as ‘Too Big to Fail’, America is now caught up in a dilemma of how to manage/regulate these behemoths. The Federal Government is not disclosing which Banks/Institutions have been deemed as such, because that would give a signal to the Public that these institutions are basically unsafe and are being propped up with the Treasury money only. Though any one who is a regular reader of financial press can easily guess as to the identities of these institutions. But how long can they be treated as TBTF ? There are already rumblings of discontent and even a Boycott movement against these TBTF Banks.
Now the US Congress/Senate is attempting to redraw the rules and is working on a law which will give the authorities the power to break up these behemoths, so in future they will be less of a risk and can be allowed to die if they get into tricky situations without pulling down the whole nation. The first step would be to re-introduce some law akin to the Glass-Steagall Act which during the Depression split the Banks’ business into regular banking and investment banking and prevented any cross over.
As many know some of the provisions of the original Glass-Steagal Act were diluted in 1999 by the Gramm-Leach, Biley Act allowed Banks to do investment banking too and which has over the last few years enabled regular banking groups to take on other paper-based business and run up huge risk, which resulted in the Financial Crisis of 2008. Firms like Goldman Sachs and Morgan Stanley cleverly changed themselves into Banks during the height of the Crisis to qualify for the TBTF label and now they are flourishing not because of their Banking business but because of their trading actitivities.
It is a good move by the legislators to break up the TBTF institutions and combined with a re-introduction of the repealed provisions of Glass-Steagall Act, they would make sure that Banks confine themselves to the business of taking deposits and lending for productive and non-speculative real estate business and thus bring a semblance of normalcy to the Banking world. The Investment Banks should be left to live or die on their own efficiencies and merits and people who invest in them or avail of their services would be taking their own risks. Not like the average depositor or borrower who will deal with Banks.
But the Financial Services Lobby is a very powerful group in the US and it has opposed these moves. With key players of the Obama Administration sympathetic to the Big Institutions it appears the Lobby may win and may thwart all attempts to have meaningful regulations in place. The Federal Reserve is also not exhibiting any support for these changes.
May be America is still thinking that it is better to not regulate too much. But as Government is now a substantial owner in many of these TBTF institutions, it has a responsibility more towards the citizens than the Bankers. And long term health of the Nation will be better maintained if some hard decisions are taken now so the Crisis is not built up again. This may be the best chance to re-introduce meaningful and effective regulation and this may be more important than other initiatives of the Government.
Let not these Too Big to Fail institutions continue life as Too Big to Break too.
It will be interesting to see how this thing plays out.
An Update (21 Nov 09):
A bubble is a bubble is a bubble, whatever the cause. And it will burst.
US is exporting its trouble around the world. Money traders and speculators are making hay while the dollar dulls. This may push back many countries to adopt more controls and undermine Capitalism some more. It is now every nation for itself to protect itself. China is way deep into the US economy and can’t decouple easily without damage to itself.
Fundamentals have not changed much in any country (excepting may be Australia) to warrant irrational exhuberance again in the stock markets.
In the US they are re-thinking the ‘checks and balances’ between the Congress and the Administration, but as long as Lobbying is on, no benefit will come to the citizens.
Interesting times indeed.
