Curious Capitalist

Post Volcker Rule, Banks Still Aren’t Safe Enough

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Seth Wenig / AP

JPMorgan Chase & Co. headquarters in New York CIty, on Oct. 21, 2013.

FDIC vice chairman Tom Hoenig, perhaps the smartest banking reformer around, gave an important speech in Europe this week. His talk, entitled “Global Banking: A Failure of Structural Integrity,” gets at exactly why, despite all the hoopla this week over the passing of the (very much modified) Volker Rule, our financial system isn’t really safer than it was before the 2008 crisis.

One of the most telling figures in Hoenig’s speech was buried in the middle: from 2008 to 2011, commercial and industrial loans to American businesses declined from $1.6 trillion to $1.24 trillion. While banks would argue that this is because demand fell off post financial crisis, the Alliance for American Manufacturing argues that it was because credit tightened so dramatically. I’m inclined to believe the manufacturers, since they’ve actually been having a substantial renaissance in recent years, and manufacturing recoveries historically pre-date larger consumer recoveries.

The point is that banks used to be the servants of American business. Now, they are its masters. Hoenig believes this is because even post-Volcker, giant banking conglomerates aren’t being broken up into smaller entities, divided along business lines (i.e. commercial lending, investment bank, trading, etc.), which would eliminate conflicts of interest that still exist as well as the Too Big To Fail (and Manage) problem. “I’m not sure [even with the Volker Rule] that customers are safer and the financial system is stronger,” he told me. “These big institutions need to be split up. I don’t know any manager who can safely handle one institution that’s holding $3-4 trillion of assets. It’s just too big.”

Indeed, Hoenig makes a persuasive case that banks themselves would become more profitable if they were split up (many of the largest and most complex firms trade at a discount from book value, suggesting that the market isn’t confident about their future performance). Certainly, it would help the rest of American business – the fact that the five largest US financial holding companies control 55 % of all industry assets (versus 20 % in 1990) keeps industry competition low and credit constrained.

So, where do we go from? I think we’re in for 2-5 years of legal wrangling about the details of Volcker, and how they’ll affect banks’ business models and whether or not it will do much to reduce risk. It’s very likely that we’ll see more banking scandals during that time, which will increase the drumbeat of calls for further reform. Hoenig, for one, agrees, and looks to money market funds and the repo market as possible sources of future crisis. Until big banks get smaller, it’s very likely we’ll see another crisis.

“Something will happen,” he says. “It always does.”

10 comments
paulgeorges
paulgeorges

In USA someone with left ideas is accused to be a communist . Nowaday someone from a bank ,trader or someone else can destroy quietly a bank because he gets the insurance that public money from taxes will help him. After he will complain and cry that he pays too much taxes and for some will escape to Switzerland .Only one thing is possible it's public and massive desobediance or revolution .Are we ready for that ? Not now, because we hate each other, but when it will become more wild ?

nyny3a
nyny3a

Our big banks have probably thieved move money from our people than all the bank robbers in all of human history, and yet, none of them have been put behind bars!

firmsoil
firmsoil

Despite democrats having made thousands of pages of functionally useless new regulations that are a huge liability on the US financial system which will loose further and faster to london and asia.

Adam_Smith
Adam_Smith

Regulators and bankers justify their great power and their magnificent pay upon the sophistication they bring to their jobs. Neither was ever going to agree to something so simple and sensible as restoration of Glass-Steagall.

BabuG.Ranganathan
BabuG.Ranganathan

SOCIETY’S RIGHTS VS. CAPITALISM’S RIGHTS

Babu G. Ranganathan

Many in society have been taught to believe that the public has no right to tell corporations what to do with their money any more than a private citizen has the right to tell his neighbor what to do with the money he earns from a business or store. This is not a fair analogy.

True enough that a private citizen doesn't have the right to tell his neighbor what to do with his money but the public does have the right to tell corporations what to do with their money. Why? Because corporations couldn't exist without very special and unique government help. Corporations are special legal entities that have unique rights, privileges, and protections given by government that ordinary citizens and business owners do not have. And, since the government in a democracy like ours comes from the people (the majority in society) the people have the right to determine how corporations act and how they spend their money. The majority in a democracy own the franchise of government! 

Therefore, the public has a right to demand something from corporations in exchange for giving corporations the right to exist. Would I not have the right, even as a private citizen, to demand something from a business built on my property? The same logic applies to the relationship between the public (society) and corporations. Corporations cannot hide behind the specious argument of rugged individualism!

Many in our society have been brainwashed to believe that an absolutely free market place with no government controls or regulations would automatically fix our nation's problems. Have we forgotten already that the Great Depression of the early 1930's was the direct result of a free market economy with no government control or regulation?

Rugged individualism teaches that the individual has the right to benefit from social and economic interactions with society, but that society has no right to demand any benefit from the individual.

However, if it is true that a person has a moral right to be a rugged individualist, looking out only for himself, then it also follows that individuals (plural), by mutual consent and agreement, have a moral right to look out for themselves. Such a moral right of individuals (plural) is the basis for majority rule and unions in our society.

Certainly, if an individual is benefiting from commerce with the many individuals of society, then the many individuals of society have a right, by mutual agreement among themselves, to demand certain benefits from the individual, benefits such as decent wages, clean air, clean water, safe working conditions, safe products, etc.

No one has absolute individual rights in society. Those who want absolute individual rights must live outside of society. Those who want to be part of society with the benefits of government and law must be willing to grant what the majority want, even if it's at their own expense.

Yes, minorities have rights, but the majority has more rights.

Absolute individualism is absolutely unfair. The majority has the right to tax an individual and collect money to build a park even if that individual doesn’t want the park and will never use the park. The majority has a right to tax an individual and use the money to provide welfare or help those who genuinely can’t help themselves in society.
 
Self proclaimed rugged individualists in society want all the benefits of what the majority has to provide - government, law, security, and protection - but they do not want to give up anything to the majority in exchange for these benefits. These so-called rugged individualists are the real leeches and parasites of society.

The fact is there are no real rugged individualists in society!  

If capitalism and social consciousness cannot coexist then how is it that modern industrialized nations such as Sweden, Norway, Denmark, and others can have a high degree of social consciousness and still be capitalistic with a thriving free enterprise.

The rich are not paying their fair share of the taxes. Even billionaire Warren Buffet has said that his office secretary pays more in taxes in proportion to her income than he does.

In fact, one of President Obama's ideas for reviving our economy is by the federal government spending money to repair the infrastructure in our country (roads, bridges, highways, etc.). Much of this money would come from taxing the wealthy and corporations and making them pay their fair share taxes.

People can still become wealthy in a socialist society but not at the detrimental expense of others in society.

Many of the basic rights, especially regarding safety in the work place, that we take for granted were not graciously given to society by the rich but won by the blood of bludgeoned workers and strikers in the early twentieth century.

The Bible doesn't say that money is the root of all evil, but that "the love of money is a root of all sorts of evil." That love of money must be constrained in society or the worst aspects of capitalism will make a living hell for millions. Thank God, of course, that there are some capitalists who don't put money first or love money. God bless them!

The Christian Scriptures have much to say against the rich and wealthy who obtain and maintain their wealth through the detriment of the rest of society (James 2: 6, 7; 5: 1-6).

Read the author's Internet article:

THE FAR LEFT AND RIGHTS OF THINGS

The author, Babu G. Ranganathan, has his bachelor’s degree with concentrations in theology and biology and has been recognized for his writings on religion and science in the 24th edition of Marquis “Who’s Who in The East.”

DeweySayenoff
DeweySayenoff

@firmsoil Considering the Republicans did nothing to stop the financial meltdown BEFORE it happened (and everyone knew it was coming), I don't expect casting stones at just one side is a sufficient argument for change.

Deregulation from the 1980's under Reagan precipitated both crises.  The first one in 1983 (the S&L meltdown, for which we are still paying) and second one in 2007 which was a direct result of human nature and a lack of proper regulation.  The taxpayers will be burdened with about 42 trillion dollars worth of FDIC repayments over the next thirty years (That includes interest), which doesn't count the 32 trillion dollars paid so far from the S&L meltdown thirty years ago.

The leftists may be incompetent in how they handle things, but at least they actually try to fix it.I'd prefer the competence of the right with the goals of the center.  But since "center" is now left to the rightists, there's no chance that anything will be done before your job is eaten again.

Hope you can find that rock you just cast.  It's going to be your lunch sooner or later.

Realworldnonfantasyland
Realworldnonfantasyland

@BabuG.Ranganathan Banks have made it so more people now then ever before in American history can afford things they never could afford.  Please keep acting like these Corporations who make billions off of us are evil, when in fact they Employ more people than in the history of the world, they improve our way of life more than any group in the history of the world.  Medicine, Healthcare, Cell Phone, Internet, Cable, Car, Food and everything else you use was improved because of a Corporation looking to make as much money as possible. Corporations have made everything affordable.   Life Improves when there is competition to make things better.  Money Drives Competition.  Quit acting like people are evil because the way they improve things is the drive to make money

firmsoil
firmsoil

@DeweySayenoff


1. Check the Glass-Steagall 1999 repeal, it has Bill Clinton's signature on it.

2. Shame on you democrats who follow Barney Frank of (Dodd-Frank fame) whose record is this!!! - http://www.youtube.com/watch?v=iW5qKYfqALE (wake up and smell the coffee)

3. Congress was controlled by Democrats after 2006 election, well before the meltdown.

4. Obama/Pelosi socialist recovery record is "95% of income gains from 2009 to 2012 went to the top 1%" (according to a right wing research organization called UC Berkely)

boubbha
boubbha

@Realworldnonfantasyland@BabuG.Ranganathan  

"Banks have made it so more people now then ever before in American history can afford things they never could afford."  
=> The money they lend doesn't exist in the first place. So are you are arguing that debt is the only way to instil money in the system?

"Please keep acting like these Corporations who make billions off of us are evil, when in fact they Employ more people than in the history of the world, they improve our way of life more than any group in the history of the world."
=> In most societies, if not all, the biggest employers are the small businesses. So are you arguing that corporations are more useful to improve "our" way of life than the millions of business that enable a healthy society to function?

"Medicine, Healthcare, Cell Phone, Internet, Cable, Car, Food and everything else you use was improved because of a Corporation looking to make as much money as possible."
=> Greed is definitely one of the greatest motivator in human history, but it is far from being the only one, and by far the most self-destructive. Most of the research behind the things/technologies you mentioned are state funded. Corporation invest to find ways to make money from that research (Which is important too). So are you arguing that a negative feeling can result in a positive outcome that is not a by-product? Are you arguing that without greed, we would be worst off as a species?

"Corporations have made everything affordable."   
=> Money is a man-made idea... what is affordable, and what is not, depends on your income/salary relative to the 'cost of production'/'price of the product'. Corporations have made it possible for many to be ok with low incomes by shifting the cost of production to places where even lower incomes are "affordable". So are you arguing that taking advantage from other's low expectations is an acceptable way to make things affordable?

"Life Improves when there is competition to make things better."  
=> Fair enough :-)

"Money Drives Competition."
=> Fair enough, although past the comfort zone, we need more than money: http://www.youtube.com/watch?v=u6XAPnuFjJc Unless you are arguing again that without greed, we would be worst off as a species  


"Quit acting like people are evil because the way they improve things is the drive to make money."
We are all potentially good and evil. However, the author of the comment didn't say that people are evil, not even that money is, just that according to the Bible "the love of money is a root of all sorts of evil" Are you are arguing that it is not the case?
___________

I think the whole point of the comment you replied to was to say that corporations are NOT people and that, as humans with basic needs to stay alive, we ought to ensure that they are not treated as such. Do you really disagree with that?