Much of the debate on the Democratic Party side of the primary silly season is related to Wall Street – easy to demonize, more difficult to understand, and altogether more complicated than sound-byte sized portions of political coverage will allow. In other words, H.L. Mencken was probably right: “For every complex problem there is an answer that is clear, simple, and wrong.” Let’s start with the proposition that our economic issues can be resolved by breaking up the large banks.
Yes, 2007-2008 still stings. The Wall Street Casino that created financial market chaos was especially harmful in Nevada, one of the “sand states” in which the real estate bubble was augmented by avarice and the Wall Street appetite for securitization of highly questionable mortgage lending products, and practices. Certainly, the call to break up the big banks resonates with a significant portion of the national as well as the Nevada population. However, this “clear and simple” solution may not be the panacea on anybody’s horizon. Here’s why:
From a consumer’s prospective, big is not always “badder.” I, for one, like the idea that my debit card is accepted in convenient locations throughout the country. I’m technologically challenged so I don’t avail myself of many advances in remote deposits, and other mobile banking services, but I sympathize with those who do. I also like making my primary banking decisions for myself, and I’m not – as a consumer/customer – particularly happy about the prospect of being dropped by my bank because it is “too big”, i.e. it has too many customers. And, here we come to a second issue.
How do we define “big” and “too big?” If we are defining “big” in terms of the amount of deposits then JPMorganChase, Bank of America, Citigroup, Wells Fargo, and USBankcorp (the top five in total deposits) are targets for the break up. Thus, if we “break up” any or all of these five based on the “size” – either the total assets or the total value of deposits – then how many customers must deal with the transition costs of moving their bank accounts?
Do we mean breaking up as in reinstituting the old Glass Steagall Act, and separating commercial and investment banking? This action wouldn’t limit the banks based on assets or deposit values, but instead would constrict their banking activities. This has some appeal, perhaps more so than just whacking up banks based on the size of their assets and deposits, but this, too, opens some questions.
One set of questions revolve around what we mean by “banking services?” For example, if a person has an account with Fidelity investments, and one of the services associated with that account is a debit card or a credit card, then does this constitute a “bank-like” service? There are banks offering brokerage accounts, and insurance services – reinstating the provisions of Glass Steagall would mean a customer would have to give up some services to retain others – or perhaps be dropped as the financial institution made its decision as to the camp it was joining – the commercial or the investment one. If a person likes the idea of consolidating investment and commercial services, and doesn’t – for one example – have much if any need for things like certified checks, then an investment account with some “bank like” services could be the best option. For others, who like the idea of a “life-line” bank and the notion that some other ancillary services may come with it, then the traditional route would be more enticing. However much a person may like the sound of “bring back Glass Steagall” there are situations in which this would mean some significant inconvenience and costs for customers and clients.
Another point which ought to be made is that all too often Glass Steagall and the Volcker Rule get mashed together as if they meant the same thing, or something close to it. Let’s assume for the sake of this piece that what we all really want is a banking system which does not turn deceptive practices into major revenue streams, and which doesn’t allow banks to use deposits to play in the Wall Street Casino.
If this is the case, then it might well do to let the Dodd Frank Act have a chance at more success. For all the political palaver about this 2010 act, it has been successful. As Seeking Alpha explains:
“Dodd-Frank did several things that promoted the culture change and reduced the likelihood that a large American bank will fail: (1) annual stress tests that forced a focus on risk management not only among risk managers but at every level of the bank; (2) establishment of the Consumer Finance Protection Board (CFPB), which has primary responsibility for consumer protection in the financial field without the conflicts of interests naturally experience by the banking regulators; (3) the Volcker Rule that removed proprietary trading from bank holding companies, thereby facilitating the cultural reform that I referred to above, and reducing the level of risk in banks’ assets; (4) enhanced capital requirements for large banks, which addressed the major weakness that permitted mortgage losses to turn into a financial debacle in 2008; and (5) living will requirements for large banks, which while perhaps unnecessary, are having the salutary effects of increasing liquidity in stressful situations and decreasing organizational complexity and thereby making big banks more possible to manage.”
In short, if the object is to make banks safer, better managed, and less likely to get themselves into the liquidity swamps of the pre-Dodd Frank era, then the act does, in fact, make the grade. Those who would like a return to the bad old days, when banks could wheel, deal, and deceive, will find solace in the slogans of many Republican politicians calling for the repeal of the Dodd Frank Act.
Yet another set of questions relate to what breaking up the banks is supposed to accomplish; or to accomplish beyond Dodd Frank. It’s easy to say that if a bank is too big to fail it is too big to exist. However, we still haven’t dealt with exactly what it means to be “too big.” Like it or not, we do have a global economy. Let’s take one example: “Global businesses want global banks. This makes intuitive sense for companies that manufacture, distribute, and sell products globally. 3M, for example, derives a majority of its sales from outside the United States, operates in more than 70 different countries, and sells products in over 200 countries.” [Brookings]
What does 3M do? Operate through a system of regional banks? (and increase costs) Or, does 3m start using a foreign bank? What does this do to American market share in global banking? And, we’re not just talking about 3m, what about Intel (82.4% sales overseas), Apple (62.3% sales overseas), General Electric (about 52% sales overseas in Africa, Asia, and Europe), Boeing (58.3% sales overseas), and Johnson & Johnson (53.2% sales in Europe)? [AmMUSAToday]
At the risk of sounding too nuanced for blog posts of a political bent, I’d offer that the Break Up The Banks bandwagon has been on the road long enough, and has been a distraction from issues that have cost the American middle class (and those trying to achieve that level of financial security) dearly in the last 40 years.
Breaking up the big banks will not assist in the organization of American workers so that the power of the owners is balanced by the power of the workers. What we DO need are government policies which support the unionization of employees. Policies which increase the minimum wage. Policies which improve wages and working conditions. And, policies which make education and training affordable.
Breaking up the big banks will not assist in establishing fair trade with the rest of the world. What we DO need are policies which promote the interests of American manufacturing, by American workers, in American plants. We need policies which affirm our support for environmental responsibility. We need policies implemented which promote modern technology and modern energy sources; with American ingenuity and labor.
Breaking up the big banks will not reform a financial system which too often rewards its components for short term gambling as contrasted with long term financial vision. It will not replace the transformed and corrupted Shareholder Theory of Value among managers. What we DO need is a system which rewards investment and replaces the fantasy of “Trickle Down” economics.
Perhaps it’s time to find a new bandwagon? One that’s going in the desired direction, and not merely headed toward a successful election day performance?