Breaking up the Banks, Like Renegotiating NAFTA?
Remember way back in 2008 when the three leading contenders for the Democratic presidential nomination all argued in favor of renegotiating NAFTA? We don't hear much talk about renegotiating NAFTA these days, even though one of the three leading contenders now sits in the White House.
NAFTA is not very popular, so coming out against it sells well with the electorate, especially among people who vote in Democratic primaries. However, the people who vote in Democratic primaries are not deciding trade policy, so it does not look like NAFTA is going to be renegotiated. There is a similar feel to the discussion of new banking rules where everyone is committed to dismantling "too big to fail" institutions.
The basic point is that we have a number of huge banks - Goldman Sachs, J.P. Morgan, Citigroup, Bank of America, Wells Fargo and Morgan Stanley top everyone's list - that everyone knows cannot fail. If these banks make bad bets and end up effectively bankrupt (as was the case last fall for Citigroup and Bank of America), the government will step in and bail them out.
This means that lenders don't have to worry about whether these banks are good credit risks, because they know that the federal government will guarantee their credit. This is a huge subsidy to these banks since it allows them to borrow at a lower cost than their competitors. I calculated that the value of this subsidy may be as much as $34 billion a year.
While everyone agrees that taxpayers should not be subsidizing these financial behemoths, it is not clear that any of the reform proposals will actually address the problem. Needless to say, Goldman Sachs, J.P. Morgan and the rest are incredibly well connected politically. For this reason, it is hard not to feel like we are hearing promises to renegotiate NAFTA. When this round of financial reform is over and done with, in all probability Goldman Sachs, J.P. Morgan and the rest will likely still be standing there, looking pretty much the same as they do now. And the rest of us will still be waiting for NAFTA to be renegotiated.
Major manufacturers began relocating their production operations towards cheap labor and environmentally nonrestrictive locals over three decades ago. NAFTA, when we are speaking of its' impact upon the U.S., was a disaster for the middle-class. The only honest way to measure the impact of the act is to look at the impact on the numbers of jobs lost and the net loss or gain in the incomes of the middle-class worker. I am neither Canadian nor Mexican, so the "good" that our neighbors gained at our expense is irrelevant to me! I never forgave Clinton for that act of treason.
November 10, 2009 7:12 PM | Reply | Permalink
Another great post.
November 11, 2009 10:25 AM | Reply | Permalink
I thought the big banks were being subsidized because they're doing God's work.
November 11, 2009 11:52 AM | Reply | Permalink
Everybody says "too big to fail," and nobody ever explains why.
Supposed Morgan failed, and the FDIC took it over.
Money would still pour out of ATM's and debit cards would still be valid.
Where's the catastrophe?
Those fuckers aren't lending anybody any money anyway!
November 11, 2009 12:07 PM | Reply | Permalink
Breaking up a bank is like breaking up a marriage or a religion, it is the denial of one's right to associate.
"that everyone knows cannot fail"
America survived the great depression where 25% of all Americans were out of work. The nation didn’t collapse. At the time of the bailout unemployment was only at about 7%. Moreover there is some evidence that bailouts can create unemployment, because businesses will not hire until the political uncertainty is cleared up.
I never saw a credible argument that America would collapse if we let the banks fail. We've been through far worse. The taxpayers saw their property rights violated without reason.
November 11, 2009 2:42 PM | Reply | Permalink