We Can't Break Up the Financial Giants . . . Or Can We? → Washingtons Blog
We Can't Break Up the Financial Giants . . . Or Can We? - Washingtons Blog

Monday, June 1, 2009

We Can't Break Up the Financial Giants . . . Or Can We?


The government and defenders of the status quo are making two main arguments as to why we can't break up the big banks and financial giants such as AIG:

  1. The U.S. would have to take over the banks in order to break them up, and that would be socialism

  2. The U.S. doesn't have legal authority to break up the big banks

I will address these in turn.

Is Breaking Up a Financial Giant Socialism?

As you've heard ad nauseum, a lot of top economists and financial experts believe that the economy cannot recover unless the big banks are broken up in an orderly fashion. (If you haven't heard, here's a partial list:

  • The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
  • Dean and professor of finance and economics at Columbia Business School, and chairman of the Council of Economic Advisers under President George W. Bush, R. Glenn Hubbard, and Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales
But many argue that it would be wrong for the government to break up the banks, because it would have to take over the banks in order to break them up.

This is true. But government regulators in the U.S., Sweden and other countries which have broken up insolvent banks say that the government only has to take over banks for around 6 month before breaking them up.

In contrast, Bush and Obama's actions mean that the government is becoming the majority shareholder in the financial giants more or less permanently. That is - truly - socialism.

Breaking them up and selling off the parts to the highest bidder efficiently and in an orderly fashion would get us back to capitalism much quicker.

Does the Government Have the Power to Break Them Up?

The second main argument against breaking up the "too big to fails" is that the government doesn't have the legal authority to do so.

For example, Vice President Biden's chief economic policy adviser said today:
I think there is a lot to be said for the argument made by the Treasury Secretary and, for that matter, the chairman of the Federal Reserve that the authority to unwind an AIG simply doesn't exist."
But William K. Black - the senior regulator during the S&L crisis, and an Associate Professor of Economics and Law at the University of Missouri - says that the Prompt Corrective Action Law (PCA) - 12 U.S.C. § 1831o - not only authorizes the government to seize insolvent banks, it mandates it, and that the Bush and Obama administrations broke the law By refusing to close insolvent banks.

Others argue that the PCA does not apply to bank holding companies, and so the government really does not have the power to break up the big boys (see this, for example; but compare this).

Whether or not the financial giants can be broken up using the PCA, no one can doubt that the government could find a way to break them up if it wanted.

FDR seized gold during the Great Depression using a bogus argument that he could do so under the Trading With The Enemies Act.

Geithner and Bernanke have been using one loophole and "creative" legal interpretation after another to rationalize their various multi-trillion dollar programs in the face of opposition from the public and Congress (see this, for example).

So don't give me any of this "our hands are tied" malarkey. The government would break the too bigs up in a heartbeat if it had the will, and then justify it using some legal argument or other.

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1 comment:

  1. AnonymousJune 28, 2009 at 2:49 PM

    Check out Brown's latest book: Web of Debt. The key is to create our own (meaning the people's) system of credit, using public institutions. And we already do this with a state bank such as the Bank of North Dakota. State tax monies go into this bank, under strict rules, and not affected by the banksters' fraud. CA needs to do this.

    Also, Switzerland has used private and public banks for centuries. Indeed today, it is the public banks around the world which are doing the best, precisely because of limited exposure to toxic derivatives. Private banks with their secret debt structures are deadly, as we now have discovered. Time for public banks and credit systems. let the people profit from the collection of interest on its own money!

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