Democrats & Liberals Archives

We Must Break-up Too-Big-to-Fail Firms

So-called too-big-to-fail financial corporations deserve a major slice of the blame for the economic disaster we are now in. Yet, because they are too-big-to-fail we bailed them out. Now they are in the process of becoming bigger. The only way to prevent them from being too-big-to-fail is to break them up. Too-big-to-fail is too-big-to-exist.

How did these corporations work to destroy our economy? How did they bring about this terrible depression? How did they become too-big-to-fail? The answer to all these questions is that Congress passed the Gramm–Leach–Bliley Act of 1999. This act repealed the Banking Act of 1933 - the Glass-Steagall Act - that separated commercial banking from investment banking.

The Glass-Steagall Act made sure that there was a wall separating unstable securities activity from stable loan activity. With Glass-Steagall Act still in place, investment banks and hedge funds handling derivatives, swaps,and other super-gambling operations for multi-millionaires may have come crashing down. However, commercial banks that handled real estate and other consumer and business loans would not have been affected by the very risky activities of investment banks. The probability of having a depression would have been decreased greatly. Or at least, it would not have been so severe.

What's the solution? Restore the Glass-Steagall Act. Senators John McCain and Maria Cantwell have introduced Wednesday an act to do just this. Here's what Senator Cantwell said in a press release:

America can’t afford another financial crisis .... "With big banks using depositor money to gamble on Wall Street, it’s only a matter of time. Banks need to be lending to small businesses and homeowners, not fueling risky Wall Street investment schemes. We must return stability, security and confidence to commercial banking for the American public. The first step is this bill.

The administration and many in Congress are against this bill. They say that corporations have already merged their banking and investment activities making it too difficult to change. This is another way of saying that we should leave too-big-to-fail outfits alone. It's another way of saying we should wait until the too-big-to-fail conglomerates produce the next depression.

We must break up these too-big-to-fail financial monsters in order to make our economy healthy. Restoring the Glass-Steagall legislation is the best way to do the breakup. Write or call your congressperson and senators and urge them to endorse and support Republican McCain and Democratic Cantwell in this legislation.

Posted by Paul Siegel at December 17, 2009 7:38 PM
Comments
Comment #292795

This is so true. It’s the only way to bring competition back to those enterprises. ( I won’t call them industries since there’s very little “work” involved)

Posted by: bandman at December 17, 2009 8:42 PM
Comment #292796

Why not just let them fail? If they are too big to be profitable then let them fail.

Posted by: Eric Simonson at December 17, 2009 9:03 PM
Comment #292803

eric, as long as their failure will not domino throughout the economy, they should be allowed be permitted to enter bankruptcy court.

Regretfully, the crisis in the banking sector last year threatened just such a domino effect down through small community banks, which in turn would have caused cascading failures in small businesses unable to borrow to stay in business, which in turn could have doubled or more the current unemployment figures, and creating a true economic depression lasting as much as several years.

This is why certain aspects of the Glass Steagle Act must be reinstated, and anti-trust regulation updated and enforced, to prevent these too big to fail entities from coming into being and breaking up those already in existence, into separate corporations by line of business.

Posted by: David R. Remer at December 18, 2009 4:14 AM
Comment #292807

Anyone want to bet this goes the way of health care reform?

Posted by: gergle at December 18, 2009 5:33 AM
Comment #292812

In response to criticism of his signing the bill when President, Bill Clinton said in 2008:

“I don’t see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn’t signed that bill…. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I’d be glad to look at the evidence.” [30]

In February 2009, one of the act’s co-authors, former Senator Phil Gramm, wrote in its defense that:

“…if GLB was the problem, the crisis would have been expected to have originated in Europe where they never had Glass-Steagall requirements to begin with. Also, the financial firms that failed in this crisis, like Lehman, were the least diversified and the ones that survived, like J.P. Morgan, were the most diversified.
” Moreover, GLB didn’t deregulate anything. It established the Federal Reserve as a superregulator, overseeing all Financial Services Holding Companies. All activities of financial institutions continued to be regulated on a functional basis by the regulators that had regulated those activities prior to GLB” Spin City, I agree Paul good article, Time to put GLB out to pasture.

Posted by: Rodney Brown at December 18, 2009 11:44 AM
Comment #292816

When a “too big to fail” bank fails, it breaks up and get devoured by other banks. If you want them broken up, then let them fail.

Blaming the financial crisis on the repeal of the Glass-Steagall act is a hard case to make, and even Ben Bernanke says that this is false. The fact is that many mortgage/consumer banks and investment banks that were not diversified failed and many that were the most diversified survived. That’s not something that can just be overlooked because liberal pundits find it politically convenient to blame Phil Gramm.

Posted by: Phillip at December 18, 2009 12:32 PM
Comment #292818


I am with gergle on this. Financial reform will face more opposition than healthcare reform. It will only take one Democrat to stop financial reform dead in its tracks.

IMO, the current healthcare reform proposals will be followed by a round of mergers and aquisitions leading to a few to big to fail healthcare insurance corporations, vying for market share and taxpayer subsidies.

Posted by: jlw at December 18, 2009 12:44 PM
Comment #292820

Jlw, the biggest “too big to fail” organization of all is the government, which is exactly why handing them more centralized control of healthcare is a terrible idea. If the programs they institute don’t work at all, the government will simply keep doing them anyway, wasting and borrowing ever greater amounts of money to prop up their failure. We’ve seen this happen so many times on so many fronts that we can pretty much sure that that’s exactly what will happen.

Posted by: Phillip at December 18, 2009 1:26 PM
Comment #292934

Philip,

You are dead on. Our Federal Government is the biggest monopoly corporation in the world.

Posted by: Eric Simonson at December 21, 2009 9:41 PM
Comment #292942

Eric and Phillip are engaging in propaganda, defining government in America as something OTHER than the collective of the States and the people who vote to elect the managers of that government. At the heart of their argument is a disdain and distrust of American government.

They attempt to deride our government on the basis of its centralization. Yet, government, by definition, is a centralization of functions, laws, and enforcements. Each State has a centralized government, and half of those are bankrupt. But, you won’t hear them deride the State governments for being centralized, which hollows their argument against federal government, which is little more than a representation of the will of the States collectively either directly or via the voters elections of their Federal government representatives.

The problem with Eric and Phillip’s argument is they attempt to blame the government without indicting the people who control the election of those in government. To do that, would not make their arguments very popular, just more realistic and logical. Hence, they engage in the same blame game politicians of differing parties do, scapegoating anyone but themselves.

When and if Eric and Phillip ever begin to substitute the people for the word, government, their arguments will find far greater credence, and point to a course of action which just might have capacity to make constructive change.

In America, to divorce the decisions of the voters on election day from the results of governance by those in charge of government, is to abdicate and accept a defeatist position of impotence. There is no changing government without first, the voters changing the criteria by which current government got elected. Doing the same thing over and over and expecting a different result, is insanity, Einstein said. And he was right.

To vote for the GOP’s candidates or the Democratic Party’s candidates based on party affiliation, has proven to be a failed strategy for bringing about the kind of change, Eric and Phillip presumably seek. Our government is designed with the vote to give the power to change government policy direction to the people. But, to exercise that power, the people must vote in a different way than before, with a different objective than just switching parties and walking away hoping for the best.

The political party’s elected officials, despite their rhetorical philosophical differences, govern very much like each other. They govern first and foremost to keep themselves and those like them in power, (gerrymandering, vote bribery via deficit pork spending, and catering to wealthy campaign donors and special interests). What is best for the country usually requires a solution yielding results only across numerous election cycles. But, when reelection dominates virtually all policy decisions, the short term expedient solution that gets them reelected will win out over real world problem solving for the people and the nation’s future.

Health care reform is a perfect example. Republicans will have no part of it, as that would give an election advantage to Democrats in 2010. Democrats on the other hand, have abandoned their principles of a single payer health care system which puts people’s health and well-being ahead of NASA programs, corporate welfare, and myriad other priorities, all in the name of getting something, anything, passed which they lay claim to as health care reform, but without addressing the foremost reason for health care reform, which is to halt the bankrupting of health insurance rate payers and the Medicare/Medicaid system which threatens bankrupting the nation.

Again, just like Republicans, the Democrats have refused the kind of health care reform the nation needs in the long run, for a reform that will benefit their incumbents in the 2010 elections. Compromise is a necessary and sometimes healthy demand which democracy places on its people, but, like anything else, too much of a thing will always render consequences out of balance, out of control, and outside the realm of sound principles and effective, maintainable solutions.

The corporate health insurers are getting an enormous amount of what they demand out of the current Senate version of the reform, in exchange for 30 million uninsured becoming insured under mandate or penalty of law and profiting the insurance companies even more, while insurance companies are restricted from canceling policies due to cost of treatments and refusing to insure those with pre-existing conditions like Acne or Excema.

The waste, fraud, and abuse well has been visited so many times for funding future policies, that it dried up decades ago. While it is possible to glean 450 billion dollars over 10 years in savings from the Medicare/medicaid system, it is almost entirely impractical to approximate even a quarter of that amount. The reason is simple. If those savings are there now in a cost and legally effective manner, they would have been harvested a very long time ago.

There is a tipping point at which the cost of fighting waste, fraud, and abuse equals or exceeds the cost of the waste, fraud, and abuse. Every private business knows this, which is why every business has an allowance for theft, bookkeeping errors, and other inefficencies standardized into Generally Accepted Accounting Practices.

Which makes the Democrat’s claim of funding the new reforms through Medicare/Medicaid savings from waste, fraud, and abuse, a fraud in and of itself, and an abuse of public ignorance, and a waste of tax payer dollars in the time and effort generated to come up with this budgeting proposal.

Republicans on the other hand, at the core of their policy preferences, would rather see death and suffering by those of lesser means, than to risk seeing their taxes raised in support of a better future for the nation’s people. Can’t afford insurance? Sorry, for your misfortune, but, why should that be a burden on tax paying Republicans? Any Republican worth their salt and respect of fellow Republicans after all, can afford health insurance, seems to be their line of reasoning in crafting their version of reform, which doesn’t address Emergency Room costs passed on to rate payers both private and public, by those uninsured with the flu, or sprain, or bad headache and slight fever.

Neither Party’s officials are holding to the kind of principles that would guide a long-term sustainable, affordable, humane as well as ethical solution to the health care crisis. Which negates the entire benefit of political parties on this issue. Democrats retain some semblance of humanity and ethical guide in their proposal while Republicans hold on to their rhetoric that private profiteers will be better for everyone’s health in the long run, than anything Democrats might propose, for 2010 political reasons.

Remember that it was Republicans who controlled the adoption of the expansion of Medicare spending with the Rx drug bill. So, when Republicans now scream entitlement expansion and deficit spending on socialized programs, do not forget that when their reelection was on the line, they were all for it.

The only way the people’s demand for more effective and long term sustainable and affordable government can be realized is if the voters drop the incumbent reelection rate of both parties from 90 plus percent on average, to 50% or less, forcing both parties to compete for those ant-incumbent voters by proposing and passing legislation which makes sense to those voters. There is the political party’s view of democracy, and then there Vote Out Incumbents Democracy. The former leads the nation to near certain ruin, while the latter at least holds out hope for a recovering nation rediscovering the meaning and power of their vote and democracy, to remove from office those who act like King George of England acted toward the colonialists.

Posted by: David R. Remer at December 22, 2009 3:26 AM
Comment #292943

Eric, government is non-profit. It is incorporated, but, it does not sell shares at fair market price to voluntary betters on the promise of return on investment. Your comment’s use of the word corporation for government is a misappropriation of the word at least, and at worst a demonstration of gross lack of education in business and English language at worst. I trust the former is the case.

A large and effective portion of our economy is run on a not-for-profit basis in very sustainable and affordable fashion while providing enormous benefit to Americans in need of resources which they cannot afford. America’s non-profits generally have a very positive history. America’s government could too, if voters elected their officials with that objective and motivation first and foremost.

Government is a non-profit entity, with something no other non-profit has, the ability to enforce its decisions beyond voluntary participation. Not an insignificant difference, I grant you. But, if voters demanded the same general net positive results of government for their vote, that they demand of the Red Cross or St. Jude’s Hospital for their donations, our government would improve dramatically as a result of the dearth of votes for current incumbents. Their replacements would choose to avoid the fate of their ousted incumbent predecessors.

Posted by: David R. Remer at December 22, 2009 3:39 AM
Comment #293510

In real terms government is not a non-profit institution. It is run fot the profit of government employees, elected officials, and those who recieve the benefits that government distributes with the funds taken from the taxpayers. In the debate over big government versus big business, we usually come down to advocating one and disparaging the other, but should we consider that both are dangerous to the peoples freedom and prosperity? In America big business arose first as the Industrial Revolution favored those could concentrate the capital for water and steam powered factories, railroads, and shipping, which fostered the rise of big finance to provide this capital. The reaction to the abuses of these institutions was to increase the size and power of government to control them. Now we have face the fact that rising to the top leadership of either big government or big business in America is a path to great riches and enormous power over the people. Neither road has historically attracted the most generous, well intention individuals.

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