Too big to bail banks are still a problem

by Glen Wallace

 A decision needs to be made regarding financial institutions as to whether they are a capitalist private enterprise or a public utility -- they shouldn't try to be both at the same time. Well, a bank can be both at the same time but we saw the consequences of attempting those dual roles in 2008. I'm concerned though that the government regulators and politicians have not learned the valuable lessons of the great recession. Instead there seems to continue to be an intermingling of poorly regulated or completely unregulated speculation on risky derivatives by the same financial institutions providing both needed business and personal lending and insurance, and also wealth management of retirement and life savings of individual citizens.

 If, say, the speculations on derivatives were to fail spectacularly, as they did for the failed financial institutions in 2008, would any jeopardizing of large bank standing on the losing end of those bets, amount to a corresponding jeopardization of the flow of lending capital keeping the business world running and the funds of savers entrusting their savings and investments in those jeopardized banks? If so, then it seems that would be prudent to take measures to completely separate banks engaging in traditional lending and cautious, well regulated investing, from investment banks that are willing to take on the risks associated with derivative trading.

 A possible world needs to be envisioned where we imagine that a given bank fails, and decide whether letting it fail will jeopardize the entire economy of the country and therefore will need to be bailed out by the country or if it will be largely just a loss for the shareholders of the bank. If it is the former, then either a separation of the risky investment banking element from the conservative traditional banking element needs to be done, or the bank needs to be broken up into smaller pieces in a manner similar to the actions by Teddy Roosevelt on Standard Oil Corporation. We need to keep taking those measures until we wind up not having to bail out any financial institution, outside of insured deposits, regardless of the scenario.