The Antidote to Too Big To Fail
An act to incorporate the subscribers to the Bank of the United States” was presented to me on the 4th July instant. Having considered it with that solemn regard to the principles of the Constitution which the day was calculated to inspire, and come to the conclusion that it ought not to become a law, I herewith return it to the Senate, in which it originated, with my objections.
-Pres. Andrew Jackson, 10 July 1832. Veto Statement for Renewel of The Bank of The United States.(HT: University of Virginia)
We can statistically quantify “Too Big To Fail” in a number of different ways. George Will of the Washington Post is man familiar with the uses (and perhaps the nefarious uses) of quantitative data. He tells us 5 banks hold assets equal to 60% of the GDP. The top 10 banks hold 61% of all commercial banking assets; they only had 26% 20 years ago.
Will’s basically Conservative bent leads him to not be fond of the Dodd-Frank Act inflicted upon American Industry by the current Obama Regime. I certainly agree and sympathize with this point of view. However, not liking Dodd-Frank is one thing, getting rid of it and the systematic problems that made its overreach tenable is a taller order than merely quantified complaining. To actually dismantle the TBTF Empire and the implicit guarantee it enjoys via Dodd-Frank, it may help us to indulge in some Presidential History involving two great men. President Andrew Jackson foresaw and attempted to prevent this problem. President Theodore Roosevelt solved TBTF in some industries other than banking.
Andrew Jackson dealt with a complicated issue when the Bank of The United States came up for renewal. He saw the benefits and feared the economic impositions that could both accompany a large banking organization protected by the favor of Central Government. He opines below in his veto letter of the re-authorization of The Bank of The United States.
A bank of the United States is in many respects convenient for the Government and useful to the people. Entertaining this opinion, and deeply impressed with the belief that some of the powers and privileges possessed by the existing bank are unauthorized by the Constitution, subversive of the rights of the States, and dangerous to the liberties of the people..
Jackson feared many things about this Bank of The United States. He felt it unfairly enriched investors through government intervention into markets. He writes thus: “The powers privileges, and favors bestowed upon it in the original charter, by increasing the value of the stock far above its par value, operated as a gratuity of many millions to the stockholders.”
He believed that foreigners who held stock were extracting capital out of the United States and thus writes: “More than eight millions of the stock of this bank are held by foreigners. By this act the American Republic proposes virtually to make them a present of some millions of dollars. For these gratuities to foreigners and to some of our own opulent citizens the act secures no equivalent whatever.”
The Bank of The United States, as proposed to President Jackson, would have acted as a Public-Private Partnership gone badly awry. Its costs would socialized, its profits privatized and its risk management strategies centered on how to profit more from moral hazard. Under the Dodd-Frank Act, banks currently holding a large enough pile of assets have been classified as Systemically Important Financial Institutions (SIFI). These banks would go straight to the front of the bailout line in the next major financial malfunction.
Every problem Andrew Jackson identified with the Bank of The United States holds true of The Dodd-Frank SIFIs. What to do? You can’t just let 60% of the GDP instantaneously vaporize, and you get no long-run improvement in their reckless behavior by classifying them as SIFIs and giving them the USG “Get Out of Stupid Free” Card. Clearly, we need a 3rd way. We’ve found that road before. Enter President Theodore Roosevelt.
President Roosevelt also encountered a situation similar to what President Romney will face in about four months, once he’s inaugurated. Roosevelt saw two problems with the so-called Trusts – his era’s version of TBTF.
First, continued exploitation of the public could result in a violent uprising that could destroy the whole system. Second, the captains of industry were arrogant enough to believe themselves superior to the elected government.
Roosevelt employed a law called The Sherman Anti-Trust Act to break up monopolies that controlled far more of their industries than super banks do right now. Standard Oil and American Tobacco both were broken up. This and 42 other suits filed by the USG under Roosevelt, established a balance between over-powered monopolies and The Federal Government.
Not all monopolies can be fought using The Sherman Anti-Trust Act. Banks may have different organizational structures not including “Holding Companies” that would exempt them. A direct imitation of Theodore Roosevelt’s policy may not succeed. However, something akin to the 1982 settlement of the AT&T Anti-trust case may be necessary to make these SIFIs spin off enough assets so that they don’t monopolize markets and pose a major destabilization risk during economic panics.
Clearly having six to ten TBTF banks in charge of over ½ of all commercial banking assets is not a stable equilibrium for the economy. Clearly taking the Dodd-Frank route of promising these institutions bail-outs every time there is an economic panic does for financial accountability what giving Mein Fuhrer the Sudetenland did for world peace. The obvious solution here is to solve the problems identified first by Andrew Jackson in his veto letter for The Re-Authorization of The Bank of The United States. The best historical model for solving this problem is probably Theodore Roosevelt’s take-down of John D. Rockefeller. Saddle up Mitt. Your first four years will be a rough ride.