Bank Reform Watch

As we speak the Senate is wading through a pile of amendments to the Dodd proposal for bank reform. Some of these have been passed already: things like raising the fees for FDIC insurance that the big banks pay, and the elimination of future taxpayer bailouts look set to be part of the ultimate package.

But the big, more controversial, amendments are getting fierce push back from the White House as well as the banking industry. The most resistance is to the Brown-Kaufman amendment to limit bank size.

For some obscure reason, the administration is hell bent on allowing the big banks to stay their current size and even to grow. This is bizarre to me, and frankly dangerous. There is no evidence to support any of the arguments made to justify the continued existence of behemoth banks. None. Anywhere. yet we are constantly being told that ‘they are good for the economy’.

I dare anyone with that view to publish their research.

They can’t, because it doesn’t exist.

On the contrary their is a growing flow of research from the Fed and from private academic sources that shows that bank size is not correlated with efficiency. More to the point, banks get more cost efficient as they grow towards about $100 billion in asset size, but beyond that they add no further incremental efficiency. On the contrary they appear o grow less efficient again.

So larger banks are not necessarily better.

But they are more powerful politically. They can shower gifts and largess on politicians. They can distort legislation in their favor. They can corrupt the electoral process by flooding it with cash. And, they can ‘capture’ the regulatory bodies we put in place to minimize the damage they can do to our economy.

Listen: this is really easy.

Banks do not produce an end product. They are intermediaries. they facilitate the movement of capital. They thus enable other people, and help those other people who do make end products. As with all intermediaries they introduce a cost into the system. Realtors make the cost of renting of buying a home higher than it otherwise would be. Society tolerates that higher cost because realtors enable more efficient search for housing than is possible without them. Bankers act in the same way. We tolerate their fees and the other costs they impose on us as long as the service they provide justifies those fees. Right now that is not the case. The fees are way too high when compared with the outcome. Banks are imposing a great cost and under-providing a service. They are therefore inhibiting the economy. They have become a burden we have to carry rather than a beneficial service provider.

Why?

Because the big banks are no longer doing banking. They are trading amongst themselves. They are shoveling capital from one to another – it’s called proprietary trading – rather than channeling that capital out into productive activities where people can make end products. As a result the economy is starved of cash for innovation and increased employment.

The banks get away with this because their size intimidates. Their influence prevents their control.

At the height of the crisis early in 2009, it is well documented that Tim Geithner took more phone calls from Jamie Dimon, CEO of JP Morgan Chase, than he did from Obama. While it is natural for the head of the Treasury Department to interact with the top bankers, this asymmetry speaks to undue influence. So it is no wonder that the administration seems to have crumpled in the face of the pressure from the big banks.

This has to end.

We need smaller banks, not just for economic reasons, but for political reasons as well.

That’s why I support the Brown-Kaufman amendment.