Before we can seek to fix all the ills of the financial crises, we should first look to a simple task; define “what is a bank?”
The recent announcements and discussion about Glass/Steagall by President Obama, and Paul Volker although soothing to the populist movement , only serve to confuse an issue that is poorly understand by the vast majority of people. That populist rage has been further demonstrated recently by movements such as Arianna Huffington’s “Move Your Money” campaign.
There are many types of banks and financial institutions in the United States. The vast majority of them in number are the community oriented commercial banks and thrifts. They number over 5,000 strong and have never been the subject of any inquiry due to excessive compensation, risky trading activity, securitization issues, sub-prime loan funding or investing, or any of the issues we see in the newspapers each day. These banks should be placed in class all to themselves, and should not have to fight or pay for the sins of the other much riskier institutions. This “A” class of banks should live in a world that encourages the lending required in the communities they serve. As for the rest, some difficult, expensive and bold decisions need to be made, namely:
- Definitive segregation of banks that use Federal Guarantees such as FDIC and borrowing capability at the Federal Reserve and those that do not
- The breakup or dissolution of any company determined to be Too Big to Fail, based not just on size, rather complexity and interconnectedness.
- An additional “FDIC” type of insurance fund for banks based on total assets that are not in the “A” Class and have riskier balance sheets
- An increasing capital structure for banks as they increase in size, and complexity
- A regulatory environment that creates tougher realistic stress testing
- The ability to wind down or place into receivership any company or bank
- An onerous tax to be levied on any company or bank that decides to undo or “giveback” any government assistance that was beneficial during the financial crises, which created a windfall profit
So, let’s first work to segregate what are called banks, and start to work on a regulatory environment which makes sense for each of these different classes. Only then can we move from the morass we are in, to an environment that encourages healthy growth in our economy and without people asking where to purchase a pitchfork.