Even Larry Summers Admits Too Big to Fail is the Central Challenge → Washingtons Blog
Even Larry Summers Admits Too Big to Fail is the Central Challenge - Washingtons Blog

Sunday, June 6, 2010

Even Larry Summers Admits Too Big to Fail is the Central Challenge

Virtually all independent financial experts are demanding that the too big to fail banks be broken up, including:
  • Chairman of the Council of Economic Advisers under President George W. Bush, and Dean and professor of finance and economics at Columbia Business School, R. Glenn Hubbard
  • The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
  • Economics professor and senior regulator during the S & L crisis, William K. Black
  • Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales

And virtually all bank regulators say that we need to break up the too big to fails, including:

(And 5 former Secretaries of the Treasury agree with Volcker.)

Even the Bank of International Settlements - the "Central Banks' Central Bank" - has slammed too big to fail. As summarized by the Financial Times:

The report was particularly scathing in its assessment of governments’ attempts to clean up their banks. “The reluctance of officials to quickly clean up the banks, many of which are now owned in large part by governments, may well delay recovery,” it said, adding that government interventions had ingrained the belief that some banks were too big or too interconnected to fail.

This was dangerous because it reinforced the risks of moral hazard which might lead to an even bigger financial crisis in future.

And many bankers are for breaking up the giants as well.

For example, the President of the Independent Community Bankers of America, a Washington-based trade group with about 5,000 members, is calling for the break up of the TBTFs.

As is former investment banker, Philip Augar.

Even the chief economic advisor to the White House - Larry Summers - admitted in January that we must end the too big to fails:

"Too big to fail is in many ways the central challenge here," he said. "Because when institutions are too big to fail, they gain a competitive advantage from the sense of government support. And so -- and that gives them an unfair competitive advantage.

"They are then able to take risks without market discipline, and when they take those risks, then they fail," he continued. "And if they're too big to fail, taxpayers are on the hook and the rest of the economy suffers, as we've seen."

Summers then said:

[Our approach] goes after too big to fail, not in one way but in multiple ways.

Summers talks a good game. But as Moody's and many others point out, the government is doing nothing of substance to rein in the too big to fails.


  1. For someone who has quit blogging, you are ... still blogging. Okay!

    What is going to happen next?

    Hank Paulson was a horse's ass but he was right about one thing; if the big banks hadn't been bailed in 2008 the entire interlocked world finance system would have crashed.

    Nobody knows what would have emerged from the rubble. You have a million in the bank, your ATM card doesn't work.

    The bank is closed ... for how long?

    What happens when the current smashup leg of the onrunning finance crisis reaches the same event horizon during the next 'few' months?

    Of course the establishment will bail. There is simply no alternative. What is taking place in Europe right now is the slow- motion outcome of a reluctance to bail. Europe in the beginning stages of the austerity/debt compounding spiral that leads to the demise of the euro.

    Breaking up the few giant insolvent banks into smaller insolvent banks doesn't cure the problem, only careful restructuring with haircuts and debt- equity swaps. This should have started years ago.

    The other essential is energy conservation. They are connected: finance/banking and energy price effects on money.

  2. The millions upon millions of dollars the banksters spend on thousands of lobbyists and bribes are to not allow themselves to be broken up.

  3. I am a Bahamian. In my humble opinion our current situation on this planet has a lot to do with rotten crumbling structures - much like a termite infested house. Our issues go well beyond too big to fail. I don't have a lot of solutions but the geo-political games played by govts. and oligarchs are wreaking havoc on the quality of life for human beings in general. We feel it in the Bahamas and we were the pawns in some very dangerous geo-poltical games. My girlfriend said something to me last year and I thought she was crazy but I think she is right - if everyone stopped paying their "bills" for about 90 days or more no matter what, the rotten systems would fall so quickly. Then it would be chaos and a mess for a while. Then something else would "grow" up out of the ashes. I don't think she is crazy anymore. Do any of us know anyone that is truly "happy" anymore? I gave her the "ethics" argument and she responded "so a liar cheats me into doing something like a house loan but I have to 'follow' the liar's rules - au contraire, be ready and willing to do what is decent but no more no less at this stage of the game. Ethics mind-games are what got the world in such a debtor state in the first place. And the answer is not lie to the liar etc. The answer is be as ethical as you can but don't allow the liar to continue lying. The system is fraudulent and based on 'air' that is frankly, toxic. You want 'value' - demand it." I think she has a point. Now after this oil volcano and apparently no real tracking of its location, I see where she is coming from. God help us all but I am now demanding decency in everything I do or I don't play at all. It actually works. Now that we are seeing that judges can be bought, the system is a wreck, etc., terrorism, torture, wars everywhere - for what? Some Oil, some money, some slave labor? Kind of sick if you ask me.


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