From Trust-Busting to Too Big To Fail

This morning, while clearing out a backlog in my RSS feeder, I watched this interesting 60 Minutes clip about the FDIC. The clip follows the FDIC as they take over and sell off a small bank. The FDIC has posted the clip on their website here, so you can imagine they come out looking pretty good (and perhaps deservingly so – as they note, not a single insured dollar has been lost since the FDIC was created). At one point, 60 Minutes discusses with Bair, the chair of the FDIC, whether or not she thinks we should limit the size of banks. Here’s the transcript (from the news story version):

“Ben Bernanke, the chairman of the Federal Reserve, says that the system is unfair for smaller banks, and that’s just the way it is,” [CBS Reporter] Pelley pointed out.

“Well, I think that’s true,” [FDIC Chairwoman] Bair agreed. “And going forward, I think we need to really review the size of these institutions and whether we should do something about that, frankly.”

Bair surprised Pelley when she suggested that maybe the mega banks, those bailed out by taxpayers, shouldn’t be allowed to exist in the future.

“I think that may be something that Congress needs to think about,” she said.

“Actually limit how big a bank can be?” Pelley asked.

“Yeah. Well, you know, I think taxpayers rightfully should ask that if an institution has become so large that there is no alternative except for the taxpayers to provide support, should we allow so many institutions to exceed that kind of threshold,” she explained.

“The idea would be that no bank would grow so large that it posed a systemic risk to the economy,” Pelley said.

“Systemic risk, that’s right,” Bair agreed.

80 years ago, the rationales for breaking up large businesses were all about preventing them from being too powerful and thus too profitable and thus driving out the competition and making everyone worse off by making a market no longer competitive. Now the rationale is about being too risky, and in particular, posing too big a risk to the economy as a whole (not even a single market)*. The combination of institutional and ideological changes that make this switch possible are pretty staggering.

* To be fair, the older rationales are still employed (think of the big Microsoft case), but this systemic risk argument seems utterly different and new (though I’ll need to do more research and report back before I’m certain… unless someone out there already has?).

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7 Comments

  1. I think that Bair has come out the best of any of the people involved in this. Maybe it’s because she hasn’t been in the spotlight that much, but I feel like she has used her platform to gently nudge policies in the right direction.

  2. charliemcmenamin

     /  March 19, 2009

    But didn’t Galbraith say, in the Great Crash of 1929, that one of the problems was that the banks were too small? I’ve always read this as meaning that, if they had been a bit bigger, they wouldn’t have failed so often. on this view, surely the contrast is not between ‘trust busting’ and ‘too big to fail’ but between ‘not big enough to weather storms’ and ‘too big to fail’.

    Of course, Galbraith might have been wrong.

  3. Chris Dodd said “no institution should ever be ‘too big to fail’.”

    How true Senator. Would this include the government institution?

  4. Mark

     /  March 25, 2009

    Interesting post!

  5. Lora York

     /  March 25, 2009

    I think this is THE critical issue for reform. I have no interest in giving the Obama administration “Resolution Authority” over other “financial institutions.” What are defined as financial? Why should they be backstopped and other industries not? Doesn’t the fact that they will be bailed out ENCOURAGE RISK rather than mitigate it?

    I feel we should break up ANY industry too big to fail–be it drug companies, airlines, steel, unions.

    Just as we are beginning the healthcare debate I watch as drug companies buy each other out, creating super drug companies with super lobbyist. Gee I wonder what will happen when we try to cut their exorbitant profits?

  6. Edward Hopson

     /  August 4, 2009

    I like what Lora York has to say. The financial and main street institutions have morphed into new entities since the days when antitrust legislation was put in place. We should encourage the government to expand antitrust laws to include
    any business that is “To Big To Fail”.

  7. gena

     /  March 24, 2013

    and yet china and other economies thrive while the rich line their pocket on the taxed to death evaperating middle class ……..