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Wednesday, October 21, 2009


too small to fail

via calculated risk:

From MarketWatch: Treasury to introduce program to help small banks

The ABA and other bank lobby groups for small banks are seeking to have Treasury develop a program to provide TARP funds to small stressed banks -- those with less than $5 billion in assets -- on the cusp of a default that haven't received TARP funds.

And I thought everyone agreed that the FDIC closing small failing banks - albeit slowly - was an example of how bank problems should be resolved. Now we have "Too small to fail"?

at this point it should be no secret to anyone that the bankers own some prime turf in washington. if you need a refresher, this week's frontline is up to the task. there is no systemic reason for small bank creditors and shareholders to be protected by the treasury in this fashion. and yet treasury will apparently be slave again to the special interests of bankers. this is likely a political horse-trade made to satisfy the powerful regional banking lobby kept in washington by the industry as reward for backing FDIC premium increases as the depository insurance fund seeks ways to replenish itself short of drawing on its credit line at treasury following on its actions to support refundings of the money center banks with bond guarantees.

one wonders at what point popular dissent against this manner of utilization of taxpayer funds might take on a more material manifestation. hard times incite radicalism, and there's been a thread of commentary fulminating in financial circles which saw some more light yesterday in the ranting of paul farrell. further, bruce judson -- who has apparently written a book exploiting what he sees as the inevitability of social fracture in the united states -- is making hay out of a telephone call he received on NPR with regards to domestic terrorism. even the op-ed page of the new york times is openly questioning public allegiance to a framework which concentrates capital at the apex of the pareto distribution -- a concentration that has already been seen in some quarters as deeply dangerous. and anyone who has cared to tune in marc faber recently has heard that western capitalist economies are approaching collapse -- the future "will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society" as faltering demographics shred government finances and force currency debasement throughout the decade of the 2010s.

now, a blog with the title this one bears cannot be unsympathetic to such views. for what its worth, my timeline of decline has less in common with faber than toynbee or spengler -- the end will come, give or take a century or three. but the views of faber, farrell, judson and many others are an expression of a popular skepticism that has really taken flight in the west only since the first world war (though its intellectual roots are certainly far deeper, dating back as far as the western schism and the fracture of the master institution of western civilization which cumulated in the reformation). that widespread pessimism with respect to the capacity and intention of institutions has worked to undermine social confidence throughout the last century, and provoked in response a steady increase of authoritarianism in western governments.

as such, it is important at least to note the brazenness of recent divergences between the perceived function of government in the service of the elite and the perceived interests of the population as a whole. such displays are frequently the spark of real popular dissent, and the return of hardship will have provided plenty of dry tinder. how, i wonder, would news outlets cast the first episode of political or commercial violence to which the result of public reaction polling was, say, 60% approval?

does this lot of outrage in print amount to a precursor of social collapse? that's great copy but also anyone's guess and in any case highly unlikely (if for no other reason that such collapses are, even if inevitable, quite rare).

what is clearer, however, is that government regulation is the intended counterweight to the protections of limited liability in an efficacious capitalist system -- and further that the level of protection now being offered banks both large and small is more than enough to suspend their private charter entirely in the longer-term interest of the public. protecting depositors with an insurance fund such as the FDIC is itself a tradeoff in this vein, as it diminishes incentives to responsible banking; but now that protection is being further extended not only to bank creditors but even shareholders to some significant extent, the entire system of private credit allocation should have to be brought inside the government firewall. for so long as the entire domestic funding structure of banks is insured, the alternative will be that lenders will have every possible incentive to abuse the underwriting taxpayer with the most extremely reckless and daring lending, knowing full well that no real harm can come to them in the likely event of failure. even if the program is retracted at some point in the future, who would believe that the precedent for the next boom and bust had not been set?

in other words, the establishment of "too small to fail" is inherently incompatible with responsible private credit allocation and indeed any meaningful conception of capitalism itself. it's at the point of "too small to fail" that the responsibility for credit allocation should be legislated to a government office, should it not? and if it is not, then does it behoove a public ultimately responsible for its own future to militate toward such ends -- or, more likely and surely better, toward a convincing repudiation of taxpayer backstops for the entire private sector bank capital structure regardless of systemic importance?

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"for what its worth, my timeline of decline has less in common with faber than toynbee or spengler -- the end will come, give or take a century or three."

What Freeman Dyson has to say about this.
So, lastly my third heresies, I say the United States has less than a century left of its turn as top nation. Since the modern nation-state was invented, about the year 1500, a succession of countries have taken turns as top nation. First it was Spain, then France, then and Britain, than America. Each term lasted about 150 years. Ours began in 1920 so it should end about 2070.

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I think this is just a manifestation of what happens when the government starts to bail out entities--all of a sudden everyone wants the same treatment. The pigs who can shove their way up to the front of the trough do so because that's where the slops are, and they are rewarded for it.

It's every man for himself, and God against all.

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well written; one of your best pieces so far

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CALPERS can join the too big to fail list

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