I’m from Missouri; show me why big banks shouldn’t fail
It may be a coincidence, but both of the Show-Me State’s Federal Reserve Bank presidents have spoken in recent days about the too-big-to-fail problem. What’s more, James Bullard and Thomas Hoenig agree that we need to find a way for big banks to fail.
Hoenig, president of the Kansas City Fed, said yesterday that
a policy of “too big to fail” raises important issues. For example, it worsens the already significant problem of moral hazard in which investors do not monitor risk appropriately, assuming, correctly it would seem, that the government will bail them out of financial problems. Capitalism is a process of failure and renewal, and a policy that undermines the process makes the financial system and our economy less efficient.
Also, when some firms are treated as “too big to fail” they receive an implied subsidy and a competitive advantage over other firms.
Hoenig advocates putting troubled big banks into conservatorship, firing management and wiping out shareholders. The government would run the bank until it could be cleaned up sufficiently for a return to private ownership.
Bullard, president of the St. Louis Fed, discussed too-big-to-fail on Friday. In notes for a speech in Arkansas, he says:
These firms are often considered “too big to fail” because of the market disruption that might be caused. The correct phrase is “too big to fail … quickly.” No firm is literally too big to fail.
Bullard doesn’t endorse any particular mechanism for closing problem banks, but he says there should be one:
The most common response to the situation has been that we need more monitoring of large financial firms. It is unclear what monitoring by itself can accomplish. We need the resolution regime.
Bullard is echoing a point that Raghuram Rajan, a prominent finance professor at the University of Chicago, made last month in a speech at the St. Louis Fed. I summarized his views in an April 17 column:
Rajan also has done a lot of thinking about the too-big-to-fail problem. One popular solution is to somehow restrict banks’ size, but that’s the type of regulation that would almost certainly be lobbied out of existence during the next boom.
A better approach, Rajan says, is to make it easier for big banks to fail. He would require every bank to describe how it could be wound down over a weekend. The obstacles that make a bankruptcy frightening to contemplate now, including international ties and opaque derivatives deals, would all be dealt with ahead of time.
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
Excellent post. When the biggest of industry don’t have the veil of protection to catch ‘em, it gives smaller competitors a fairer chance to gain market share. A lot of good healing is done after the bleeding.
“I’m from Missouri; show me why big banks shouldn’t fail.”
What kind of a title is that? Like Missourians are too stupid to understand why for themselves?
Wouldn’t other banks learn lessons if a big bank fails? If they do not learn anything, then they are not paying attention to the industry. If any bank/business is in bad enough shape, it should fail. You do not see the Government stepping in to save a mom-and-pop bank from failing.
“that’s the type of regulation that would almost certainly be lobbied out of existence during the next boom”
This should NOT be possible, and wouldn’t if we didn’t have the best politicians money can buy.
It should be illegal to contribute to any candidate one isn’t eligibel to vote for, and should also be illegal to contribute to more than one candidate in any given race.
Your money should not overshadow my vote!
WARNING! Persons on a fixed income such as Social Security or disability must beware. Bank of America just instituted a change in policy. Previously, persons with minimal income, primarily from Social Security or disability, were exempt from minimum balance requirements instituted by the bank. This has just changed so that these persons will not only be charged an increased service fee for falling below this minimum balance, but the fees for checks returned for insufficient funds will be increased as well. This should be a subject for review by the FTC and/or the legal system as part of a class-action lawsuit or Executive Order.
These persons, more often than not, are already struggling to make ends meet and are now being socked by these additional fees!!
Very clever–doing a nearly endless amount of brand name dropping for the infamous far right wing outfit funded by super-rich Republican Rex Sinquefield(the Show-Me Institute). I am sure the mostly male, mostly pale, old boys club there is happy with that service from you, Mr. Nicklaus!
I would just like to remind my right wing friends, who are sycophants to the Saint of Selfishness (Ayn Rand) and her BFF, Milton Friedman, that it was the deregulation(aka “free” market) school of economics(and its political partner: Reaganism/Thatcherism)which gained the upper hand nearly thirty years ago globally and gave us this world-wide economic meltdown via the sick gambling fever of the derivatives market. We are going to have oversight and regulation whether the super-rich corporate elite likes it or not. Deal with it.
Republican Congressman Ron Paul has introduced legislation to audit the Federal Reserve. I wonder how Bullard and Hoenig feel about that! The Federal Reserve Bank was created in the second decade of the last century to provide a balance in the financial sector between the interests of big business, big banks, and the vast majority of the people(working folks). It has shown a proclivity to tip the balance, time and again, in favor the fatcats and needs transparency, which would reveal what it is: another club of mostly male, mostly pale, and super-rich corporate elitists. Maybe an investigation would ask why there is a constant revolving door between the Fed and the notorious hard right wing think tanks, like the Cato Institute. (Mr. Bullard’s predecessor, Mr. Poole, is now a “scholar” there as is the former vp of the Houston Fed.)
The right wing cabal of Fox “News”, hate radio, and the US Chamber of Commerce who orchestrated and took over the tea bag protests should beware of the pitchforks, which might be turned on them–and for good reason!
Yes, whiterose, I’m sure David was referring to Rex Sinquefield, and not to, say, the motto that is even on our license plate! Jeez.
I was with Hoenig until he started talking about the government taking over. Bad idea. Everything else, especially shareholders getting wiped out, will happen anyway if they fail, so why not let it and a better bank will step in to fill the void. As Hoenig said, that is the true process of capitalism and it should happen unincumbered.
@Steve, the Supreme Court of the United States disagrees with you. Not that I don’t want to see some restrictions on lobbying myself, but what you propose would be illegal and isn’t going to happen.
@mushroomdude, a class action lawsuit based on what exactly? That isn’t illegal for them to do. They can switch banks if they don’t like it.
@whiterose: Well, looked who showed up again. How many times do you have to be reminded that the Federal Government and their meddling ways were the birthplace of this whole mess? If it wasn’t for them forcing loans being made to people who should not have received them (aside from the house flippers, who timed it badly and that is their problem), this whole mess could have been avoided. Derivatives were not the problem, the pile of bad loans that got bundled into derivatives was the problem. And it wasn’t even that all those investment bundles were bad, but since no one could figure out which ones had the bad mortgages included in them it brought down ALL of them. But why mess with facts when you can keep worshipping at the altar of Uncle Sam and his thousands of programs. Aside from your label calling, group mugging, conservative bashing, and DNC-induced dribbling rant, you don’t have a single shred of anything remotely useful in your post. That’s how I know it was you that has returned…
You forgot your standard kool-aid line by the way Whiterose. Make sure you include it next time…
First to Paul: anyone who read Mr. Nicklaus regularly knows that he worships the Rex Sinquefield micro-think tank called the Show-Me Institute. If you don’t believe me, just check out Mr. Nicklaus’ blog roll(see: Show-Me Daily). And while you are at it, just go to that far right wing website and check out their Board of Directors–a real, honest-to-goodness, motley crew of mostly male, mostly pale, old boys!
Second to Tim: do a little research my Fox “News” loving right wing friend–this most recent of economic calamities is much bigger than the Community Reinvestment Act. It’s world-wide and has at its root the economic philosophy of the totally discredited Milton Friedman School of Economics, i.e., anti-regulation, laissez-faire loving, government is the problem, etc. mindset. And, by the way, your pals, Cheney and Bush, pushed for the “ownership society” and the former Federal Reserve chairman Greenspan, encouraged the sub-prime lending. But, again, this meltdown is bigger than the housing bubble and symptomatic of the discredited Reagan/Thatcher/Friedman ideology. And another thing, Clintonian Democrats were as much a part of the problem as the Reagan Republicans. How’s that for bipartianship? Tim, please try watching something other than billionaire Rupert Murdoch’s Fox “News” or reading only his paper, the Wall Street Journal. You might learn something useful for a change. Change is good! Kool-aid is not!