Posts tagged ‘Too Big To Fail’

05/23/2012

Bank Bailouts: Were They Needed?

As the banks crashed in 2008, George Bush’s government took action to bail them out, and his emergency measures continued under President Obama in 2009, and beyond, as both parties, at least tacitly, approved of the efforts.

During the Republican primary debates in 2011 and 2012, all of the conservatives criticized the bank bailouts, including Congresswoman Bachmann who categorically opposed all government loans. Congressman Ron Paul said he would not give any assistance to any private firm. He mocked the bailouts saying: “They thought the world would end, if we did not bail out the banks.” He was concerned, because he said the Fed even sent five billion overseas to bail out foreign banks.

Gov. Huntsman opposed the bailouts, arguing we spent trillions, and have nothing to show for it. Sen. Santorum opposed the bank rescue, noting he would have done nothing about the meltdown. He said the financial institutions should have been allowed to go bankrupt. Why prop them up through government, he asked? Santorum asked Gov. Romney why he supported the Wall Street bank bailouts, if he believed in capitalism. Why not let destructive capitalism work, he asked?

Gov. Romney felt President Bush had to take action to keep all banks from closing, but characteristically contradicted himself, saying: “I didn’t want to save Wall Street banks.” Romney also said if Europe had a financial crisis, he wouldn’t give a blank check, or go over there to save their banks, but then he contradicted himself again, saying he would take action, if all of the economies of the entire world were collapsing, because we would need to prevent a contagion from affecting U.S. banks.

While the banks survived thanks to the bailouts, we have no way of knowing for sure what would have happened if the government had done nothing. At the very least, several major institutions would have closed their doors, and it is likely the entire economy would have sustained major seizures. Instead of 10% out of work, the country may have confronted a 25% unemployment rate, and people would have been asking why no intervention was taken.

In retrospect, the bank bailouts were appropriate to get the big institutions through their perilous moment, provided the loans extended by the government are now fully repaid, with interest.

Since the big banks were “too big to fail,” the government made the correct decision to save them, but now that the crisis has ended, it’s time to break them up, under new antitrust laws, so if we face a similar situations in the future, we will be able to let much smaller downsized institutions simply go under.

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05/16/2012

Antitrust: Tougher Simpler Laws Needed

The problem of banks “too big to fail” was addressed in the Republican Presidential debates, as Gov. Huntsmann argued they set the nation up for a long-term disaster. He noted six banks control 9.4 trillion dollars, or 60 to 65% of GDP, with implicit taxpayer guarantees of protection. While he suggested they be “right-sized,” or reduced to a “proper size,” no one in the Republican Party openly advocated the filing of federal antitrust actions against these institutions, to bust them up.

President Obama should direct his Antitrust Division at the Justice Department to file lawsuits against all banks “too big to fail” to break them up, since they need to be able to go under, without taxpayer bailouts, to protect our system from harm. He should simultaneously ask Congress to amend the antitrust laws so market shares of 10% or more become presumptively illegal. The antitrust exemption for insurance companies should also be ended.

“Antitrust” arose late in the 19th Century, when big corporations, managed by trusts, operated free of government regulation, and controlled prices by eliminating competition. A populist one-issue Anti-Monopoly Party first appeared in the 1884 Presidential election, and the Democrats soon co-opted their platform.

The Sherman Antitrust Act of 1890 made monopolies, contracts in restraint on trade, and attempts to monopolize, illegal. In Standard Oil (1911), the Supreme Court ordered the dissolution of Standard upon finding they unreasonably affected interstate commerce, by destroying competition and restraining trade.

Antitrust law was strengthened under the Clayton Act (1914), which in part was to stop companies from becoming monopolistic in the first place, by prohibiting mergers that “substantially lessen competition.” The Federal Trade Commission (1914) was added to investigate antitrust violations, and to seek enforcement.

Problems arose in antitrust prosecutions in terms of how to define “market share.” Are coffee and tea in competition with each other? Are banks and derivative brokers in the same market? Geographic issues also posed problems. What geographic area is involved? Do we examine just Wall Street, all U.S. institutions, or only international banks? How much control leads to a monopoly? While 90% is clearly monopolistic, what about 60%, or market shares of less than 30%?

Since the crash of 2008, it is now time for Congress to revise the antitrust laws to expand their scope, and make the breakup of companies “too big to fail” much easier. They should declare market shares of 10% or more per se illegal, so competition is enhanced, and the risk of failure is reduced.

They should also eliminate the antitrust “exemption” enjoyed by insurance companies. The bailout of the American International Group (AIG), a multi-national insurance corporation, was done because it was “too big to fail.” The nation cannot afford the risk posed by such oversized entities. There is no rational reason for their antitrust exemption and they must be busted up.

It is time to break up corporations without the need to prove anything, except a market share of 10% or more. Since the Republicans will never approve of any regulations, the Democratic Party and President Obama will have to take the lead.