Simon Johnson critiques a speech given by Treasury Secretary Tim Geithner earlier this week:
Mr. Geithner’s thinking is completely flawed on bank size. The right lesson should be: big banks have gotten themselves into trouble almost everywhere; U.S. banks are very big; these banks have an incentive to become even bigger; one or more of these banks will reach the brink of failure soon.
This has been a long time complaint of mine. IMO if it’s too big to be allowed to fail, it’s too big to be allowed to exist.
Big banks are also a greater risk of regulatory capture than small ones. They’re certainly morely likely to hire retiring regulators and apparatchiks at big salaries than small banks are and, worse, regulators know it. They’re also far better positioned for lobbying to ensure that legislation is favorable to them.
Scale is important in being economically viable in banking today. But it comes with all the problems you cite, Dave. I don’t have an answer, I really don’t.
But its more complex than going back to local banks.
Really? Why?
The question is why scale is important is the basic question. I can think of any number of prospective reasons.
– big foreign banks
– low margins due to loss of traditional business
– big businesses do business with other big businesses
– big banks are better able to deal with big government
all of which I think are addressable.
Big banks anywhere are going to present a problem. Especially if they are bailed out by their home government.
Soooo…make it up on volume? Are you suggesting that big banks have increasing returns to scale? That is as the number of inputs increase the output increases by a large amount?
Well unless there aren’t other big businesses.
I think this is more of a bug, not a feature from the perceptive you are taking.
In other words, you are going to have to force the world banking system to an outcome it wont naturally gravitate towards given the current government/regulatory situation.
Or even shorter, forget it wont happen it is as likely as limited purpose banking. :p
“In other words, you are going to have to force the world banking system to an outcome it wont naturally gravitate towards given the current government/regulatory situation.”
The banks naturally gravitate towards becoming larger. It is what banks have been pushing for at least since Regan was Sec. of the Treasury.
On scale, Johnson has posted several studies at his site showing that economies of scale stop being effective well below the size of our current mega banks. The biggest failure of the financial reform effort was not breaking up the big banks.
Steve
I’m not surprised. Economies of scale usually play out and you end up in the region of decreasing returns to scale. It is why you can’t grow the world’s food supply in a flower pot. That was kind of my point. The economies of scale argument may sound good to some lay people, but I suspect that often it is rubbish when talking about firms that are already big.
What? Look out JP is going to come after you for suggesting that rent seeking has played a role in the size of banks.
Oh and stop your whining our government/regulatory structure is “good enough”.
Look out, Steve V is going to single me out in a a childish way … oh wait, he already did.
God what a child.
Anyway, while I accept that “it’s too big to be allowed to fail, it’s too big to be allowed to exist” is fine in theory, I think regulation (with all its flaws) is the only politically possible path.
It comes down, perhaps sadly, to some imperfect regulation is better than none.