With JP Morgan-Chase bleeding $2 Billion in losses this week from risky ‘investments,’ it is scary to note that more than half of the banking deposits in the United States are now held in JP Morgan and just 4 other "Too-Big-To-Fail" banks: Bank of America, Citigroup, Wells Fargo and U.S. Bancorp.
In other words, the entire “too big to fail” fiasco is worse now than at the outset of the financial crisis of 2008.
And one of the nation’s most historically conservative financial institutions – the Dallas Federal Reserve Bank – has just released a report calling for the breakup of the nation’s largest banks – a position this Blog has held since the origin of the crisis.
A readable 20-page essay entitled “Choosing the Road to Prosperity - Why We Must End Too Big to Fail—Now" appears in the recently-released 2011 Annual Report of the Federal Reserve Bank of Dallas. Written by Harvey Rosenblum, the head of the Dallas Fed’s Research Department, the essay lays out the failure of the bailout approach, as well as toothlessness of the Dodd-Frank Act that was supposed to reign in the banks.
“You need not be a reader of Adam Smith to know the power of self-interest— the human desire for material gain. Capitalism couldn’t operate without it. Most of the time, competition and the rule of law provide market discipline that keeps self-interest in check…When competition declines, incentives often turn perverse, and self-interest can turn malevolent. That’s what happened in the years before the financial crisis.”
Banks have grown larger in recent years because of artificial advantages, particularly the widespread belief that government will rescue the creditors of the biggest financial institutions. Human weakness will cause occasional market disruptions. Big banks backed by government turn these manageable episodes into catastrophes. Greater stability in the financial sector begins when TBTF (“Too Big To Fail”) ends and the assumption of government rescue is driven from the marketplace.
A financial system composed of more banks, numerous enough to ensure competition in funding businesses and households but none of them big enough to put the overall economy in jeopardy, will give the United States a better chance of navigating through future financial potholes and precipices.”
And finally, in language plain and clear:
“The Dallas Fed has advocated the ultimate solution for TBTF—breaking up the nation’s biggest banks into smaller units.”
We Agree.
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