Do We Really NEED The Giant Banks? → Washingtons Blog
Do We Really NEED The Giant Banks? - Washingtons Blog

Wednesday, August 5, 2009

Do We Really NEED The Giant Banks?

Bernanke, Summers and Geithner say that we can't let the giant banks fail, because - without them - the economy will be starved of credit and we will be plunged into a depression.

This isn't true.

Says Who?

If we really needed the giant banks, the following top economists and financial experts wouldn't have said that the economy can only recover if the insolvent "too big to fails" are broken up:

  • 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

The above-described leading economists wouldn't have recommended breaking up the banking giants if they thought that their survival was necessary for an economic recovery. Other lending institutions can step up to the plate to make loans.

Small Banks Can Fill Big Shoes

Fortune pointed out in February that smaller banks are stepping in to fill the lending void left by the giant banks' current hesitancy to make loans. Indeed, the article points out that the only reason that smaller banks haven't been able to expand and thrive is that the too-big-to-fails have decreased competition:

Growth for the nation's smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under...

As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.

BusinessWeek noted in January:

As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners...

At a congressional hearing on small business and the economic recovery earlier this month, economist Paul Merski, of the Independent Community Bankers of America, a Washington (D.C.) trade group, told lawmakers that community banks make 20% of all small-business loans, even though they represent only about 12% of all bank assets. Furthermore, he said that about 50% of all small-business loans under $100,000 are made by community banks...

Indeed, for the past two years, small-business lending among community banks has grown at a faster rate than from larger institutions, according to Aite Group, a Boston banking consultancy. "Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks," says Christine Barry, Aite's research director. "They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers."

And Fed Governor Daniel K. Tarullo said in June:

The importance of traditional financial intermediation services, and hence of the smaller banks that typically specialize in providing those services, tends to increase during times of financial stress. Indeed, the crisis has highlighted the important continuing role of community banks...

For example, while the number of credit unions has declined by 42 percent since 1989, credit union deposits have more than quadrupled, and credit unions have increased their share of national deposits from 4.7 percent to 8.5 percent. In addition, some credit unions have shifted from the traditional membership based on a common interest to membership that encompasses anyone who lives or works within one or more local banking markets. In the last few years, some credit unions have also moved beyond their traditional focus on consumer services to provide services to small businesses, increasing the extent to which they compete with community banks.

Big Banks Aren't Really Focusing On the Lending Business Anyway

Since Glass-Steagal (the law saying banks couldn't use their customer's deposits to make speculative investments) was repealed in 1999, the giant banks have made most of their money in trading assets, securities, derivatives and other speculative bets, the banks' own paper and securities, and in other money-making activities which have nothing to do with traditional depository functions.

Now that the economy has crashed, the big banks are making very few loans to consumers or small businesses because they still have trillions in bad derivatives gambling debts to pay off, and so they are only loaning to the biggest players and those who don't really need credit in the first place. See this and this.

So we don't need these giant gamblers. We don't need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are lenders.

Small Banks Can Do Things Better Than Giants

The above-described Fortune article also points out that the banking giants are not necessarily more efficient than smaller banks:

The largest banks often don't show the greatest efficiency. This now seems unsurprising given the deep problems that the biggest institutions have faced over the past year.

"They actually experience diseconomies of scale," Narter wrote of the biggest banks. "There are so many large autonomous divisions of the bank that the complexity of connecting them overwhelms the advantage of size."

And Governor Tarullo points out some of the benefits of small community banks over the giant banks:

Many community banks have thrived, in large part because their local presence and personal interactions give them an advantage in meeting the financial needs of many households, small businesses, and agricultural firms. Their business model is based on an important economic explanation of the role of financial intermediaries--to develop and apply expertise that allows a lender to make better judgments about the creditworthiness of potential borrowers than could be made by a potential lender with less information about the borrowers.

A small, but growing, body of research suggests that the financial services provided by large banks are less-than-perfect substitutes for those provided by community banks.

It is simply not true that we need the mega-banks. In fact, as many top economists and financial analysts have said, the "too big to fails" are actually stifling competition from smaller lenders and credit unions, and dragging the entire economy down into a black hole.

Of course, if banks were public utilities, there would be enough credit for everyone.


  1. Excellent post. It seems that people are starting to wake up to the many advantages of keeping things local, including using a local bank. Next step, get more people to stop buying from Walmart, Best Buy, Target, Home Depot, etc. Bring the manufacturing jobs back to the US from China.

  2. These large banks are needed.They loan and manage money for multi national corporations. If small banks were to take over it would mean growth for small business. Mom and pop stores might open. It might even lead to more local production of goods. This would harm important people!

    This is another example of selfish Americans. Every item produced in the USA harms the Global economy. Next thing you people will begin to demand is the the Federal Reserve be abolished just so you won't have to pay wealthy bankers interest on what you think is your money. Drink the Blue Kool Aid, it is healthy.

  3. Gauging the aptitude and the altruism of all these actors is more important than size discrimination.

    The demonization of large banks is due in part to the rapacious greed of those in their employ, -but also- this demonization is due to the size of the target put out for incompetents whose altruism is best measured by gauging their desire to stand upon what is otherwise a rubbish heap of purported economic genius.

    What is lost in the analysis is that all these so-called large banks are fictitious in the common parlance, a parlance that attributes to any of them -a consciousness, a soul or body.

    In this sense, -they do not exist.

    These large banks are made up of individuals, some of whose hubris has grown gravely out proportion to any real significance.

    Keep your eye on the money. And do not be deluded into thinking it was the mirage of an unconscious-unthinking entity that benefits from any of it.

    It is the same illusion as suffered by those who think they have stock shares in one of these companies. They have stock shares, but the relationship between the stock share, and the company is very near to meaningless.

  4. The biggest problem w/these large banks is that they are involved in an incestuous relationship w/governments the world over. Instead of retiring to green pastures, senior bankers and officials sleep in the same beds w/the same partners. They stifle creative or outside thoughts.

    The US can start by extending non-compete provisions to include government work. In other words, a retiring banker or retiring senior bureaucrat is banned from working at a bank or public office for a period of 20 years after retirement.

  5. nader paul kucinich gravelAugust 5, 2009 at 6:53 PM

    Future of a Nation that can not trust the Government & Propaganda Media?
    How many times has the Government & Propaganda Media lied to you?
    Chronic lying as career path or intellectual prostitution for paycheck?
    Gravel Kucinich Paul Nader McKinney Ventura Sheehan Kaptur.
    Fool me once shame on you, fool me twice shame on me.
    Poodles, Puppets, Sham debates, Scam elections.
    9/11 liars, AIPAC liars, Federal Reserve liars.
    Speak no evil, hear no evil, see no evil?
    Greed & corruption or conscience?
    Leaks from Whistleblowers.

  6. Great documentation, George :)

    I yield my analysis and policy proposal to one of the brightest minds in American history:


    “I have long been compelled to believe, that all that is now or ever has been required to secure permanently, is a safe deposit for all the unoccupied moneys of the country, and an ever strengthening bond of National union, as well as the best currency, that our country or the world ever saw, will be for the Government to do now, what should have been done at the close of the civil war,—and at the close of the war of Revolution against England—namely, to make the people’s money, found in circulation at the close of the war the sole money of the country, and the unflactuating measure of all values, receivable for all forms of taxes, duties and debts, and interconvertible with the interest-bearing bonds of the Government, which should bear an equitable but low rate of interest.

    …How can we, as a Republican and a free people, control the Financial Institutions and the policy of this Government in the interest and prosperity of the whole people?

    It is evident, that some fatal errors have been committed, some where, by which want, ruin and distress have been introduced, where before was prosperity, abundance and full employment for the enterprise and industry of this nation.
    Individuals may suffer from extravagance, over-trading or over-production; but how can a whole nation have its joy and prosperity turned into mourning, but by the fatal errors of its ruling classes, which make the laws, and can thus mete out injustice and dry up the resources of a nation by rapacity and greed of gain, instead of diffusing happiness, education and freedom among the people.

    Misgovernment and the faults of the ruling class have always proved in history the trouble and sorrow of nations. All the responsibility of a nation’s happiness, which may depend on a people’s laws and administration, must rest upon those, who are, for the time, the law making and administrative class.

    Though the influences, that are now working against the rights of labor and the true interests of a Republican Government, are insidious and concealed under plausible reasons, yet the danger to our free institutions, now, is no less than in the inception of the rebellion, that shook our Republic to its centre. It is only another oligarchy, another enslaving power, that is asserting itself against the interest of the whole people. There is fast forming in this country an aristocracy of wealth—the worst form of aristocracy, that can curse the prosperity of any country. For such an aristocracy has no country—“absenteeism,” living abroad, while they draw their income from the country, is one of its common characteristics. Such an aristocracy is without soul and without patriotism. Let us save our country from this, its most potent, and, as I hope, its last enemy…It was well said, lately, by one of the Southern statesmen, that the “Government had impoverished, discomfited, and crushed the South more by its financial policy, since peace was declared, than by its arms during the whole war of Rebellion! ”

    If the people can look for no relief from the present Congress and Administration—if those, who now sway the financial interests of the country cannot see their great opportunity—then new men must be chosen by the people, whom they can trust to make laws, and execute measures, that “shall secure the blessings of liberty to themselves and their posterity.”

  7. The first post to this blog is right on. Every thing big needs to go starting with the banks. I would put Health Insurance Co. (the big 5) out of business next. The Walmarts of the country next. Put back in place the Import tariffs on all manufactured goods large enough to pay for single payer health care, lower taxes on wage earners, tax the hell out non goods producing investments, ban all speculative commodity trading. That's a start get this done and then we can talk.

  8. Good post overall but that globalresearch article at the end is absolute shite. I can't comment directly on all of it but the section on the Alberta Treasure Branch was copy-pasted almost entirely from ATB's own promo material.

    Nevermind the fact that since the great depression it's been almost impossible not to make money in Alberta. We happen to be floating on oil and the massive investment that's been flowing into that sector for decades now has coattailed everything else along with it. ie: The service industry. It's even padded the budgets of the rest of the country via equalization payments.


→ Thank you for contributing to the conversation by commenting. We try to read all of the comments (but don't always have the time).

→ If you write a long comment, please use paragraph breaks. Otherwise, no one will read it. Many people still won't read it, so shorter is usually better (but it's your choice).

→ The following types of comments will be deleted if we happen to see them:

-- Comments that criticize any class of people as a whole, especially when based on an attribute they don't have control over

-- Comments that explicitly call for violence

→ Because we do not read all of the comments, I am not responsible for any unlawful or distasteful comments.