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Greenspan Says U.S. Should Consider Breaking Up Large Banks

40 points by nice1 17y ago

nickpinkston 17y ago
Let's change the reserve ratio requirement to a sliding scale with larger ratios required for larger deposit holding banks, we'd see large banks broken up naturally to take advantage of the better investment deals by being small. The FTC might be appropriate now, but we need to stop being so reactionist.
- cma 17y ago
  That would just make things worse. Systemic risk would be discounted by the new, smaller banks even more since. If you do something to increase the risk of everything falling apart and you make up 30% of everything, you discount the real cost of the risk by 70%. If you are only 5%, you discount the risk by 95%.
  - nickpinkston 17y ago
    It seems you're saying that small banks would be riskier because they have less influence overall in the market. I'm sure the JPMs of the world do take such risks into account, however I find it hard to believe that this consideration is greater than the negative effects of a moral hazard of bank bailouts. Vis-a-vis - the larger the bank the more its failure would affect the economy as a whole (hence the Fed / Tres. would bail them out, which was widely recognized) & also they have a higher concentration of lobbying funds and ability to collude. I see my reserve ratio change as a definite net gain.
- dantheman 17y ago
  Let's make the reserve ratio 100% if any other business did what banks did they'd be prosecuted for fraud.
  - mediaman 17y ago
    And no business should ever get a loan?
    - dantheman 17y ago
      You can have loans without a fractional reserve system.
      - m_eiman 17y ago
        E.g. http://en.wikipedia.org/wiki/JAK_members_bank http://en.wikipedia.org/wiki/JAK_members_bank
        mediaman 17y ago
        I read through the link a few times and it seems not to support your point at all. This bank is not actually a ful-reserve bank; they still issue loans, and therefore the deposits immediately available are less than the total deposits owned by customers. They just replace "interest" with "savings points" in an attempt to address the perceived evils of usury. Like Sharia-compliant banking, it's a deceitful shell game of syntax to comply to the letter of a principle. Can someone explain how a bank can issue a loan and still maintain 100% of its deposits in cash on hand? A full-reserve bank merely becomes a storage business for a customer's cash; there can be no loans.
  - philwelch 17y ago
    Actually, they would be prosecuted for banking without following the relevant regulations. That's like saying, "if any other professional did what proctologists do, they'd be prosecuted for sexual assault".
    - dantheman 17y ago
      If you put gold in wharehouse and they say that you can retrieve it at anytime, and then turn around and give it to others -- how is that not fraudulent? It only works because they hope that not everyone will demand their gold back at the same time, so they can give you other peoples gold. My issue is only with demand deposits; if you put the money in an account like a CD where you agree to take it out in X amount of time, then they can lend it out.
protomyth 17y ago
I do wish, instead of "saving" the big banks, we had broken them up and given the chunks to the smaller well run banks. Instead we gave them the money to buyout better run banks.
- kgrin 17y ago
  I agree, though as a matter of policy you have to ask - how do you actually "break them up"? On what basis? You can't just have the government ordering companies to break up. Unlike, say, Standard Oil, antitrust laws don't apply here (the problem isn't antitrust, it's systemic risk). So either you need some new laws, or just have to ask very nicely (though as a matter of future policy, regulators can - and should - refuse to approve these financial mega-firm mergers). I suppose the government could have played a game of chicken (as it did with GM): "do what we tell you (break yourself up into smaller pieces) or we'll let you go under"... but if we've demonstrated that we weren't willing to countenance these institutions going under at that particular point in time, I'm not sure how credible the threat would be.
  - philwelch 17y ago
    You'd need some sort of new law. And for it to work, you'd need a breakup to actually be in the interest of the shareholders. This shouldn't be hard, since owning stock in JP Morgan Chase is a worse deal than owning stock in 10 diversified smaller banks which you can freely mix and match with other stocks.
  - anamax 17y ago
    > I agree, though as a matter of policy you have to ask - how do you actually "break them up"? On what basis? You can't just have the government ordering companies to break up. It's not clear that govt can't break them up now. Govt is technically the controlling entity for a large number of them. It can bring the question to the board and if the board votes for breakup.... With ordinary shareholders, there are laws protecting the minority on a fiduciary basis, but they don't apply to govts. Besides, one can reasonably argue that a breakup would increase shareholder value.
- tedunangst 17y ago
hristov 17y ago
Very interesting development, but it has already been discussed on YC.
Flemlord 17y ago
Duplicate: http://news.ycombinator.com/item?id=884462 http://news.ycombinator.com/item?id=884462
joe_the_user 17y ago
At one point, no bank was considered too big to fail, Greenspan said. That changed after the Treasury Department under then-Secretary Hank Paulson effectively nationalized Fannie Mae and Freddie Mac... Uh, actually I think the first "too big to fail" bank was Continental Illinois, bailed out in the seventies. Funny how this claim might give one the impression that the Fed under Greenspan wasn't indirectly pumping up the market based on investors relying on the credit of "too big to fail" institutions. But it absolutely was. Indeed investors relying on the "too big to fail" assumption underlay the whole subprime/AIG/etc episode and Greenspan was at the helm at this time. Though to be fair, the collapse was somewhat hastened by Paulson and company being inconsistent in their judgments about who should fail, killing Lehman but saving AIG. This, and only this, is something Greenspan might complain. "Look, my house of card, you Cretans let it collapse"
- theoneill 17y ago
  "Look, my house of card, you Cretans let it collapse" It sounds like you're talking about Knossos.
known 17y ago
While http://en.wikipedia.org/wiki/Fed http://en.wikipedia.org/wiki/Fed is regulating the Cash Reserve Requirements why isn't http://en.wikipedia.org/wiki/SEC http://en.wikipedia.org/wiki/SEC regulating the Market Capitalization to 2 times the Company's Quarterly Sales? "If it moves, tax it. If it keeps moving, REGULATE it. And if it stops moving, subsidize it." --Reagan
- anamax 17y ago
  > "If it moves, tax it. If it keeps moving, REGULATE it. And if it stops moving, subsidize it." --Reagan Note that this is a description of govt from a criticism of govt by Reagan.

40 points by nice1 17y ago

Let's change the reserve ratio requirement to a sliding scale with larger ratios required for larger deposit holding banks, we'd see large banks broken up naturally to take advantage of the better investment deals by being small. The FTC might be appropriate now, but we need to stop being so reactionist.

cma 17y ago
That would just make things worse. Systemic risk would be discounted by the new, smaller banks even more since. If you do something to increase the risk of everything falling apart and you make up 30% of everything, you discount the real cost of the risk by 70%. If you are only 5%, you discount the risk by 95%.
- nickpinkston 17y ago
  It seems you're saying that small banks would be riskier because they have less influence overall in the market. I'm sure the JPMs of the world do take such risks into account, however I find it hard to believe that this consideration is greater than the negative effects of a moral hazard of bank bailouts. Vis-a-vis - the larger the bank the more its failure would affect the economy as a whole (hence the Fed / Tres. would bail them out, which was widely recognized) & also they have a higher concentration of lobbying funds and ability to collude. I see my reserve ratio change as a definite net gain.
dantheman 17y ago
Let's make the reserve ratio 100% if any other business did what banks did they'd be prosecuted for fraud.
- mediaman 17y ago
  And no business should ever get a loan?
  - dantheman 17y ago
    You can have loans without a fractional reserve system.
    - m_eiman 17y ago
      E.g. http://en.wikipedia.org/wiki/JAK_members_bank http://en.wikipedia.org/wiki/JAK_members_bank
      - mediaman 17y ago
        I read through the link a few times and it seems not to support your point at all. This bank is not actually a ful-reserve bank; they still issue loans, and therefore the deposits immediately available are less than the total deposits owned by customers. They just replace "interest" with "savings points" in an attempt to address the perceived evils of usury. Like Sharia-compliant banking, it's a deceitful shell game of syntax to comply to the letter of a principle. Can someone explain how a bank can issue a loan and still maintain 100% of its deposits in cash on hand? A full-reserve bank merely becomes a storage business for a customer's cash; there can be no loans.
- philwelch 17y ago
  Actually, they would be prosecuted for banking without following the relevant regulations. That's like saying, "if any other professional did what proctologists do, they'd be prosecuted for sexual assault".
  - dantheman 17y ago
    If you put gold in wharehouse and they say that you can retrieve it at anytime, and then turn around and give it to others -- how is that not fraudulent? It only works because they hope that not everyone will demand their gold back at the same time, so they can give you other peoples gold. My issue is only with demand deposits; if you put the money in an account like a CD where you agree to take it out in X amount of time, then they can lend it out.

protomyth 17y ago

I do wish, instead of "saving" the big banks, we had broken them up and given the chunks to the smaller well run banks. Instead we gave them the money to buyout better run banks.

kgrin 17y ago
I agree, though as a matter of policy you have to ask - how do you actually "break them up"? On what basis? You can't just have the government ordering companies to break up. Unlike, say, Standard Oil, antitrust laws don't apply here (the problem isn't antitrust, it's systemic risk). So either you need some new laws, or just have to ask very nicely (though as a matter of future policy, regulators can - and should - refuse to approve these financial mega-firm mergers). I suppose the government could have played a game of chicken (as it did with GM): "do what we tell you (break yourself up into smaller pieces) or we'll let you go under"... but if we've demonstrated that we weren't willing to countenance these institutions going under at that particular point in time, I'm not sure how credible the threat would be.
- philwelch 17y ago
  You'd need some sort of new law. And for it to work, you'd need a breakup to actually be in the interest of the shareholders. This shouldn't be hard, since owning stock in JP Morgan Chase is a worse deal than owning stock in 10 diversified smaller banks which you can freely mix and match with other stocks.
- anamax 17y ago
  > I agree, though as a matter of policy you have to ask - how do you actually "break them up"? On what basis? You can't just have the government ordering companies to break up. It's not clear that govt can't break them up now. Govt is technically the controlling entity for a large number of them. It can bring the question to the board and if the board votes for breakup.... With ordinary shareholders, there are laws protecting the minority on a fiduciary basis, but they don't apply to govts. Besides, one can reasonably argue that a breakup would increase shareholder value.
tedunangst 17y ago

hristov 17y ago

Very interesting development, but it has already been discussed on YC.

Flemlord 17y ago

Duplicate: http://news.ycombinator.com/item?id=884462 http://news.ycombinator.com/item?id=884462

joe_the_user 17y ago

At one point, no bank was considered too big to fail, Greenspan said. That changed after the Treasury Department under then-Secretary Hank Paulson effectively nationalized Fannie Mae and Freddie Mac... Uh, actually I think the first "too big to fail" bank was Continental Illinois, bailed out in the seventies. Funny how this claim might give one the impression that the Fed under Greenspan wasn't indirectly pumping up the market based on investors relying on the credit of "too big to fail" institutions. But it absolutely was. Indeed investors relying on the "too big to fail" assumption underlay the whole subprime/AIG/etc episode and Greenspan was at the helm at this time. Though to be fair, the collapse was somewhat hastened by Paulson and company being inconsistent in their judgments about who should fail, killing Lehman but saving AIG. This, and only this, is something Greenspan might complain. "Look, my house of card, you Cretans let it collapse"

theoneill 17y ago
"Look, my house of card, you Cretans let it collapse" It sounds like you're talking about Knossos.

known 17y ago

While http://en.wikipedia.org/wiki/Fed http://en.wikipedia.org/wiki/Fed is regulating the Cash Reserve Requirements why isn't http://en.wikipedia.org/wiki/SEC http://en.wikipedia.org/wiki/SEC regulating the Market Capitalization to 2 times the Company's Quarterly Sales? "If it moves, tax it. If it keeps moving, REGULATE it. And if it stops moving, subsidize it." --Reagan

anamax 17y ago
> "If it moves, tax it. If it keeps moving, REGULATE it. And if it stops moving, subsidize it." --Reagan Note that this is a description of govt from a criticism of govt by Reagan.