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Opinion: Too big to fail

Opinion: Too big to fail

October 7th, 2012 by Rutland (Vt.) Herald, via The AP in News

From The Rutland (Vt.) Herald, Oct. 4, 2012:

One of the confounding difficulties of the financial meltdown in Europe and the United States is the way that the big banks are able to hold nations hostage.

"Too big to fail" is the way we have described the power of the banks. Because they occupy a central role in national economies, governments have felt compelled to bail out banks teetering under the weight of bad loans. Essentially, the big banks have a gun pointed at the heads of the Western governments, and they are threatening to pull the trigger unless governments take Draconian measures to make sure the banks get what is owed to them from the bad loans they have made.

The lesson we need to learn is that banks are different from other businesses. They are the institutions that other businesses depend on for financing, both short and long term. Back in the fall of 2008, we saw what happened when the financial system seized up and businesses were not able to obtain credit. The entire economy went into a tailspin, and millions of jobs disappeared.

Europe is experiencing a prolonged version of the meltdown, particularly Greece and Spain. The European Central Bank has promised to prevent the demise of the euro, which means it intends to keep Greece afloat, but only with conditions so extreme that Greeks are rioting and right-wing extremism is spreading. (Echoes of the 1930s ought to be chilling.)

Greece has brought on many of its problems itself, just as the United States has done, especially at the level of the states, such as California. California, which has an economy far larger than Greece's, has economic problems caused by political dysfunction as extreme as that in Greece.

Thus, it is plain to see that the failure of the banks has consequences more dire than the failure of a widget factory, or even an industry such as the steel or auto industries. Keeping individual industries alive is important for large concentrations of workers and for large regions, as we have learned from the Obama administration's rescue of the auto industry. But the failure of the banks can create a nationwide meltdown affecting everyone.

It is easy to see, therefore, why the Bush and Obama administrations supported the bank bailout program of 2008 and 2009. They had no choice. The gun was pointed at their heads.

But what should be the reaction of the American people to the hostage situation in which they have been placed? In Europe people are rioting in the streets. In the United States anger was directed by the tea party movement toward the government, which had come to the rescue of the banks.

In fact, the government needs to recognize that high finance is a special case and needs to be kept on a tight leash, precisely because of its power and willingness to hold the nation hostage.

Numerous writers have explored the abuses of the financial industry, including Michael Lewis, whose book "Boomerang" examines over-the-top financial malfeasance in Iceland, Ireland, Greece, Germany and the United States. One disparity he mentions is the disparity of incomes between bankers in Germany and the United States. Top bankers in the United States earn tens of millions of dollars in bonuses and other rewards. Bankers in Germany earn in the hundreds of thousands and believe it would be somehow disreputable to take more.

The United States needs to shake its timidity about enforcing strict regulation of the financial industry to prevent future hostage situations. Popular anger about financial malpractice ought to be channeled toward measures to prevent future abuses rather than punishing the unfortunate governments that had to fork over the ransom. The ransom was paid for all of us. Unless payments were forthcoming, the banks were ready to bring down the world and to watch a new depression spread misery and mayhem across the globe. It is still happening in Europe because the banks are still in the driver's seat and governments are enforcing the austerity measures the banks are requiring. But the lessons of the 1930s are still there to be learned.