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This analysis is a bit disingenuous, from the article: "The larger they are.. the result is an implicit subsidy: The banks that are potentially the most dangero

This analysis is a bit disingenuous, from the article: "The larger they are.. the result is an implicit subsidy: The banks that are potentially the most dangerous can borrow at lower rates, because creditors perceive them as too big to fail." As an implicit subsidy it is not as if there the 83 billion dollars that can be "taken away" from the banks and used for other purposes. The implicit government guarantee has value but if you can not find a way to recover that value in some other way when taking it away from the banks you would just be robbing the economy of that growth. That being said it seems like the way to remedy this would be to use a tax mechanism that can measure this subsidy and extract it from the banks in a manner that is fair to bank investors and citizens.

damoncali 14y ago
...or just break them up. Is it worth the extra .8% to risk the entire system?
eek04 14y ago
Presuming that the theory is correct, there seems to be two sides to this: First, you're going to be transferring that money to the banks/institutions that lend to them. So the money isn't going away, it's just ending up as profit for somebody else (as compensation for them considering themselves to be taking on more risk.) Second, the taxpayers going to get rid of that amount of cost in the form of risk; the averaged risk is paid by the taxpayers, it is just paid in bulk when the banks are about to fail. This assumes the calculations are all correct, and it doesn't count in what indirect cost the economy would have from loans getting a bit more expensive overall.
- damoncali 14y ago
  This is the part that gets me, as I've been saying this for a while - Left unchecked, the superbanks could ultimately require bailouts that exceed the government’s resources. Picture a meltdown in which the Treasury is helpless to step in as it did in 2008 and 2009. Makes one side seem a little less important to me.
  - snambi 14y ago
    Well, it is certainly possible. It can go from "too big to fail" to "too big to rescue". When that happens these banks, it would be disaster for many countries, not just companies.
- eplanit 14y ago
  Exactly. "So what if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all?". I would want to scrutinize the calculations.
forgottenpaswrd 14y ago
tax more?This is making the state bigger. Big private corporations are as bad as big public corporations. Break them into pieces. Separate investment banking from banking. Not that difficult to do. It was done in the past, and worked.
- calhoun137 14y ago
  You make a pretty good point here. Breaking up the big banks would be super easy, just like ending slavery, you just set the slaves free, not that difficult. >> Big private corporations are as bad as big public corporations. I think you miss the bigger picture the article paints, which is that the big banks actually function as part of the government in many ways. One aspect of this is described by the article, the big banks can't exist without massive financial support from the tax payers in the form of low interest rates and implied bailouts. I also think you don't understand that only the power of the federal government can break up the banks. Show me one example in of all history where a big bank was broken up by a small decentralized governement? go ahead, ill wait...
- nickik 14y ago
  > Separate investment banking from banking. Funny you say that. The banks that where baild out, where investment banks, the hole reason for such a rule was that normal banks would get bailed out and investment banks would. But since its not actually about helping the people to bail out banks it did not matter. > It was done in the past, and worked. Where? Almost every big bank that failed was saved in some matter investment or not, look at the To big to fail book (or listen to this podcast by the author http://www.econtalk.org/archives/2009/10/gary_stern_on_t.html http://www.econtalk.org/archives/2009/10/gary_stern_on_t.htm...).
janj 14y ago
There were three solutions given and not one mentioned taking money away from the banks: One option is to make banks fund their activities with more equity from shareholders, a measure that would make them less likely to need bailouts (we recommend $1 of equity for each $5 of assets, far more than the 1-to-33 ratio that new global rules require). Another idea is to shock creditors out of complacency by making some of them take losses when banks run into trouble. A third is to prevent banks from using the subsidy to finance speculative trading, the aim of the Volcker rule in the U.S. and financial ring-fencing in the U.K.
danmaz74 14y ago
Too big to fail is a real problem, but the assertion in the article is more than "a bit" disingenuous. It is _very_ disingenuous, because what they try to measure (money saved by the big banks with lower interest rates) isn't at all what the taxpayers pay - economy isn't a zero-sum game. There will certainly be a correlation in the long run, but that number they throw there has 0 credibility imho.
- gadders 14y ago
  It's not just banks that are too big to fail - so was General Motors. What would the solution be there?
  - damoncali 14y ago
    GM was not too big to fail. GM was propped up because the administration wanted to for political reasons.
    - gadders 14y ago
      Is one better than the other?
      - damoncali 14y ago
        Sort of. I'd rather have politicians handing out indstury subsidies by choice than being held hostage by their own frankenstein monsters. But I hear ya.

damoncali 14y ago

...or just break them up. Is it worth the extra .8% to risk the entire system?

eek04 14y ago

Presuming that the theory is correct, there seems to be two sides to this: First, you're going to be transferring that money to the banks/institutions that lend to them. So the money isn't going away, it's just ending up as profit for somebody else (as compensation for them considering themselves to be taking on more risk.) Second, the taxpayers going to get rid of that amount of cost in the form of risk; the averaged risk is paid by the taxpayers, it is just paid in bulk when the banks are about to fail. This assumes the calculations are all correct, and it doesn't count in what indirect cost the economy would have from loans getting a bit more expensive overall.

damoncali 14y ago
This is the part that gets me, as I've been saying this for a while - Left unchecked, the superbanks could ultimately require bailouts that exceed the government’s resources. Picture a meltdown in which the Treasury is helpless to step in as it did in 2008 and 2009. Makes one side seem a little less important to me.
- snambi 14y ago
  Well, it is certainly possible. It can go from "too big to fail" to "too big to rescue". When that happens these banks, it would be disaster for many countries, not just companies.
eplanit 14y ago
Exactly. "So what if we told you that, by our calculations, the largest U.S. banks aren’t really profitable at all?". I would want to scrutinize the calculations.

forgottenpaswrd 14y ago

tax more?This is making the state bigger. Big private corporations are as bad as big public corporations. Break them into pieces. Separate investment banking from banking. Not that difficult to do. It was done in the past, and worked.

calhoun137 14y ago
You make a pretty good point here. Breaking up the big banks would be super easy, just like ending slavery, you just set the slaves free, not that difficult. >> Big private corporations are as bad as big public corporations. I think you miss the bigger picture the article paints, which is that the big banks actually function as part of the government in many ways. One aspect of this is described by the article, the big banks can't exist without massive financial support from the tax payers in the form of low interest rates and implied bailouts. I also think you don't understand that only the power of the federal government can break up the banks. Show me one example in of all history where a big bank was broken up by a small decentralized governement? go ahead, ill wait...
nickik 14y ago
> Separate investment banking from banking. Funny you say that. The banks that where baild out, where investment banks, the hole reason for such a rule was that normal banks would get bailed out and investment banks would. But since its not actually about helping the people to bail out banks it did not matter. > It was done in the past, and worked. Where? Almost every big bank that failed was saved in some matter investment or not, look at the To big to fail book (or listen to this podcast by the author http://www.econtalk.org/archives/2009/10/gary_stern_on_t.html http://www.econtalk.org/archives/2009/10/gary_stern_on_t.htm...).

janj 14y ago

There were three solutions given and not one mentioned taking money away from the banks: One option is to make banks fund their activities with more equity from shareholders, a measure that would make them less likely to need bailouts (we recommend $1 of equity for each $5 of assets, far more than the 1-to-33 ratio that new global rules require). Another idea is to shock creditors out of complacency by making some of them take losses when banks run into trouble. A third is to prevent banks from using the subsidy to finance speculative trading, the aim of the Volcker rule in the U.S. and financial ring-fencing in the U.K.

danmaz74 14y ago

Too big to fail is a real problem, but the assertion in the article is more than "a bit" disingenuous. It is _very_ disingenuous, because what they try to measure (money saved by the big banks with lower interest rates) isn't at all what the taxpayers pay - economy isn't a zero-sum game. There will certainly be a correlation in the long run, but that number they throw there has 0 credibility imho.

gadders 14y ago
It's not just banks that are too big to fail - so was General Motors. What would the solution be there?
- damoncali 14y ago
  GM was not too big to fail. GM was propped up because the administration wanted to for political reasons.
  - gadders 14y ago
    Is one better than the other?
    - damoncali 14y ago
      Sort of. I'd rather have politicians handing out indstury subsidies by choice than being held hostage by their own frankenstein monsters. But I hear ya.