Break Up America's Banks

The large number of people who protested against Barack Obama's healthcare plan in Washington last week drew an enormous amount of media attention.
Clearly some of the leaders are certifiably crazy, questioning whether
Obama is an American and likening him to Hitler. But many of the
protesters had reasonable concerns about how the plan would affect the quality of care that they and their loved ones receive.

It
was also striking how often the protesters complained about a
government that was out of control and not responsive to ordinary
people. One of the items that often came up in the interviews reported
in the media was the bank bailout. Clearly this is an enduring and deeply felt cause of resentment.

It
would be very hard to tell these people that their concerns on this
topic are misplaced. At a time when tens of millions of people are
facing unemployment or underemployment, when millions are at immediate
risk of losing their homes, the banks seem to be doing better than
ever. Goldman Sachs used its government-guaranteed loans to make risky bets that paid off big time. It now plans to distribute $9bn in bonuses
to its executives and top traders at the end of the year. Why shouldn't
the protesters be absolutely furious about an administration that used
taxpayer dollars to make some of the richest people in the country even
richer?

It would be great if the anger of these protesters could
be turned in a productive direction. Instead of trying to prevent the
government from extending healthcare coverage, how about going after
the banks that pillaged the country?

The obvious place to start
in this effort is the break-up of the "too big to fail" behemoths. It
is now pretty much official policy that financial giants like
Citigroup, Bank of America and Goldman Sachs will not be allowed to
fail. If their bad investment decisions again bring them to the edge of
bankruptcy, the federal government will again rush to the rescue,
handing out whatever cash and loans are needed to keep the banks
afloat.

This status gives these banks a clear edge in credit
markets against their smaller competitors. If everyone knows that the
government can be counted on to come to the rescue of these banks, then
there is less risk in lending them money. Therefore, they pay lower
interest rates than if they had to borrow in a free market.

The Obama administration has proposed
to correct this inequity by having higher capital requirements and
tighter restrictions on risk-taking that will make it undesirable for
banks to be too big to fail. In principle, the government could impose
restrictions that are sufficiently onerous to offset the advantages of
the government safety net, but no one outside of the Obama
administration believes this will happen.

The simpler course is
to just break them up. We don't have to turn Citigroup and Bank of
America into hundreds of small community banks, just large regional
banks that can be safely put through a bankruptcy/resolution process if
they mismanage their assets. My guess is that most of people protesting
healthcare reform last weekend would support this idea.

A second
issue likely to draw the support of the protesters is the
democratisation of the Federal Reserve. There is already a left-right
coalition in the House of Representatives behind a bill calling for an
audit of the Fed.

This is a case where the centrist elites have
shown complete contempt for the American public. In fact, Federal
Reserve Board chairman Ben Bernanke had the gall to argue against an audit of the Fed, warning that it would lead to increased instability.

Did
Bernanke forget that less than a year ago he told Congress that the
policies pursued by him and his predecessor had brought the economy to
the brink of a complete collapse? How do you get less stable than that?
This is the sort of nonsense that shows the contempt that the elites
have for the masses on both the left and right.

This suggests a
great opportunity for a joint effort by the left and right to
democratise the Fed. It is absurd that the US has a central bank that
is more accountable to the financial industry than to the public.

A
joint effort has enormous potential. It will be hard for the elites to
even understand such a joint effort of the left and right against the
centre. As an example, the New York Times actually asserted that the
bill to audit the Fed has "250 Republican" co-sponsors in the House, ignoring the fact that the Republicans are a minority in the 435 seat chamber.

But
the ignorance of the elite only increases the probability of success.
And, if there is one thing this economic crisis demonstrates, the elite
can be very very ignorant.