Reports from the Reagan Administration have then Secretary of the Treasury George Schultz being advised that some company was in trouble and was “too big to fail.” His response was: “make them smaller!” Schultz’s response was correct then and more so today. Unfortunately it went unheeded as these statistics by Jerry O’Driscoll make clear:
… since the early 1970s, the share of banking assets belonging to the five largest banks has grown from 17 percent to 52 percent of the total. These financial institutions expand in size to capture the government support available only to the largest banks.
The unholy relationship between big government and big corporations has mutual advantages for them but not for citizens. As the government has degenerated toward the rule of man instead of the rule of law, these relationships thrived. The US has become a corporatacracy, abandoning much of its free markets heritage.
Nowhere is this unholy alliance more apparent than in the financial industry. The political class is at least as smart as bank-robber Willie Sutton. Accordingly, they developed a strategy similar to his: “I rob banks because that is where the money is.”
There are differences between Mr. Sutton and our current lot of politicians. What Mr. Sutton did was rob from the banks. What our politicians do is rob for the banks. What Willie did was illegal. The modern-day theft of the banks and the politicians from the public is not. Willie went to jail. His modern-day counterparts have buildings and roads named after them.
There are signs that “bank theft” may have gone too far. A recent report from the Federal Reserve Bank of Dallas was described by Mr. O’Driscoll:
It is authored by Harvey Rosenblum, the bank’s Director of Research. Since Richard Fisher, the bank’s president, signed off on the annual report, one presumes he endorses the substance of the essay.
It is a very hard-hitting piece, arguing that “the vitality of our capitalist system and the long-run prosperity it produces hang in the balance.” It explains why TBTF is “a perversion of capitalism,” which undermines faith in markets. Rosenblum quotes Allan Meltzer on point: “Capitalism without failure is like religion without sin.”
I hold out little hope for politicians doing the right thing, at least with regard to their constituents. They can be counted on doing the right thing for themselves, however. Sometimes, but not often enough, these right things coincide. The banking situation has gotten so egregious that we may be near one of those intersections. The seriousness of the distortions in the banking sector may have brought us to just such a point. According to O’Driscoll:
The essay notes that “commercial banks holding roughly one-third of the assets in the banking system did essentially fail,surviving only with extraordinary government assistance.” As noted elsewhere, “a bailout is a failure, just with a different label.” Amazingly, the report even identifies two of the failed institutions – Citigroup and Bank of America (albeit in a footnote).