This year’s annual report from the Federal Reserve Bank of Dallas includes an essay by the president of the Dallas Fed explaining that despite the great crisis of 2008 the nation’s biggest banks look much as they did before the financial crisis — only bigger. Harvey Rosenblum, the head of the Dallas Fed’s research department, elaborated on this theme in an all-encompassing indictment on our country’s financial system.
Despite the loud and unified public outcry against the too big and too many to fail banks, the government is complicit in continuing business as usual over three years later. Given the influence of money these banks possess, the political risk simply outweighs the good for society. In the 2010 campaign cycle, banks gave more than $18.8 million to federal candidates, committees and parties. The largest expenditure though was invested in fighting financial reform prior to the signing of the Dodd-Frank bill. The industry paid lobbyists $1.3 billion in 2009 and through the first three months of 2010. We can rest assured that these same businesses are now spending as much money, if not more, to lobby for curbs on the new law.
Unbelievably, the five largest U.S. institutions control 52% of the banking industry. Unfortunately these exact institutions are precisely the ones that practice the riskiest behavior of undercapitalization. This is the root cause for our economy languishing in neutral. A healthy financial system requires well-capitalized banks with the resources to cover losses from bad loans and investments. The insufficient capital pervasive in over half of our banking industry is the friction that is weakening our entire economy.
Bank capital is an issue of regulatory policy and our policymakers are not addressing the issue. Policymakers could immediately impact the economy by requiring banks to hold additional capital, with the institutions carrying riskier “assets” to hold more capital. Smaller banks with less risky behavior shouldn’t face the same regulations as larger more risky banks. After all, the shadow financial market is still unregulated. These secretive and unregulated “assets” are on the balance sheets of these institutions and should require additional capital since they can hardly be considered comparable to traditional assets.
The sheer size of these institutions and obvious presumption of government bail-out promotes the continuation of risky behavior. Our political leaders must break up these institutions into smaller units. Our economy is structured as one of capitalism and this requires the freedom to succeed and the freedom to fail. The preservation of these too big to fail institutions undermines the structure of our entire economy. Capitalism also requires that our government enforce the rule of law. The privatization of profits and socialization of losses is completely unacceptable and drastic measures must be taken by the government to eliminate its possibility in the future. Breaking up these out-of-control banks into institutions that can be responsibly managed and effectively regulated is the only acceptable policy response.
Demanding this from political leaders dependent on the banking industry for their careers will never work. We are over three years into this and there is not even a discussion on Capitol Hill about downsizing the five institutions controlling 52% of the banking industry. Possibly the sting of such back-stabbing would be less painful if the wrong-doers had at least been held accountable, but once again, our government is beholden to the banking industry and virtually nobody has been punished. We can eliminate the confusion for our elected representatives about whose interests they must prioritize as #1 by cutting out the undue influence of money in politics.
