Federal Reserve Board

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Bernanke Confirmation

I have left Bernanke’s confirmation for a second term at the Fed uncommented upon for the simple reason that I have little to add. But for the record: on balance I opposed his re-appointment.

On the negative side:

  • He has shown little indication that he intends to adjust the Fed’s activities in light of the experiences from the crisis.
  • He was culpable in the run up to the crisis because he maintained the low interest rate and easy money regime of his predecessor.
  • He seems incapable of advocating of implementing thorough bank reforms.
  • He is insensitive to the need for a consumer protection agency in finance.
  • He is too wedded to orthodox economic principles.

On the positive side:

  • He reacted well and forcefully once the crisis began.
  • He implemented a highly unorthodox ‘quantitive easing’ program once it became apparent that orthodox policies were having no effect.
  • He is a known quantity to the markets.
  • He is one of our leading experts of crises such as the one we just went through.

In my opinion the negatives above outweigh the positives and therefore he should not have been re-appointed.

The 70 – 30 vote in the Senate was a historically narrow margin in favor of re-appointment, so evidently opposition ran strongly against him. Those who voted to support him have, by extension, voted in favor of the entire set of actions the Fed undertook and is currently undertaking in support of the economy. This does not augur well for reform. The discussions and questioning that accompanied the confirmation hearing simply stand as testimony to the shallow and politicized nature of the Senate’s procedures. Bernanke should he been raked over the coals, and asked, in far more detail, to reveal what actually went on during crises negotiations and policy meetings. Instead the Fed remains an opaque and mysterious body beholden to the banks it supposedly regulates. Even its geographical organization is riven through with anachronism: we have two Fed districts in the farm belt, but none in the southeast where much of the crisis brewed. California remains horribly under represented, as does the South. A more modern structure may have meant more or better information flowing in about local housing conditions.

I am getting tired of coming across instances of systemic or structural problems in American governance. The entire edifice is overly rigid and extraordinarily unresponsive in times of crisis. This is partly due to the fact the constitution was deliberately framed to act against change – in particular to prevent democracy from breaking the peace and quiet of the status quo; and partly due to an unwillingness to recognize or correct deficiencies. Americans are seemingly indifferent to the system of government that affects so much of their lives. The wild over-influence of the farming states both in the senate and in the Federal Reserve Board acts as an anchor preventing change. It is undemocratic and unfair.

And it helps lead to the legislative gridlock that now is crippling the Senate, and therefore the country as a whole.

Bernanke’s confirmation hearing should have acted as a lightening rod for thorough debate about recent monetary policy and prospective financial system reform. Instead it became yet another gentlemen’s club discussion and a processional affirmation of a ‘good old boy’. That 30 senators mustered the energy to vote ‘no’ in such sclerotic circumstances surely implies that discomfort and anger must be pent up in that musty, old fashioned, and anti-democratic hall. If this is the best they can do to vent those feelings it is no wonder nothing gets done there.

Thomas Jefferson was right: we don’t need the Senate. It is a quaint anachronism that should be abolished.

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Obama and The Banks: Part 2

Well Obama came out swinging. Not quite hard enough for my taste – I remain a hard liner when it comes to the banks – but at least there was a hint of anger and a suggestion of a willingness to fight. That is a pleasant change from the insipid and muddled approach we had to suffer through on health care. The immediate downward plunge in bank stock prices was an accurate reaction from the markets. It could be, I stress that word ‘could’, that the days of bank rent seeking are over.

Let’s hope anyway.

The really good news, and I must admit it was both a great boost and surprise, was that Paul Volcker seems suddenly to have gone from forgotten periphery figure to central actor. Almost overnight the so-called ‘Volcker Rule’ has become a major component of the administration’s attempt to re-regulate the banking industry. Since I have always had a soft spot for Paul Volcker, I have to voice my pleasure at this turn of events.

The basic themes of the new proposal are to place limits on bank size and to separate investment banking from commercial banking in the manner of the old, and much lamented, Glass-Steagall Act. The banks took decades of lobbying to get rid of Glass-Steagall and only one decade to abuse their new powers sufficiently to warrant its return. If that isn’t a lesson for economists I don’t know what is.

For those of you whose eyes glaze over whenever bank reform is mentioned please pay attention: in my opinion – and I am by no means alone – getting the banking system back onto a sound footing is the most important single structural domestic issue facing America today. Balancing the Federal budget is a distant second. Fixing health care is part of the budget balancing process and so is subsumed in that second priority. You will notice that I was careful to say ‘structural’ issue because I view getting the employment situation as a cyclical or short term issue. The difference, of course, is that structural issues are those that need permanent or long term attention.

The banking system is broken. It is being exploited by ruthless individuals at the big banks to pad their own wealth. It has veered into unsafe territory because those individuals are willing to take vast risks with other people’s money safe in the knowledge that if they screw up they will be bailed out by the taxpayers. This sounds too simple to be true, but it is the essence of our problem. The big banks have gone on an orgy of risk taking that they scarcely understood and failed to manage. Traditional banking skills like relationship building and tending were thrown overboard and new skills introduced: ‘deal making’ became the norm. So perverse did the banking culture become that deal making was seen as a new form of relationship building. Goldman Sachs exploited its relationships to broker deals and saw itself as the epitome of a relationship bank.

But relationships in banking are not asymmetrical in the way Goldman sees them: they are mutual. Both sides should benefit. I read and hear far too many complaints from Goldman customers that the information they hand over on the course of one deal is then exploited relentlessly by Goldman for its own profit in unconnected deals. It might not be against the law, but it is corrosive to long term mutual benefits if the bank can endlessly take information and use it for its own book without compensating the customer in some way.

As I mentioned yesterday one reason I advocate breaking up the banks – rather than simply restricting their size – is to induce competition. The relationship exploitation I just referred to is one form of anti-social behavior that extra competition would control or eliminate. Right now Goldman and the others can run roughshod over their own customers because those customers have little choice about where to go to get their banking needs met.

I have said it hear repeatedly: the benefits of capitalism – which are abundant – are only ever delivered in real terms when competition exists. The heart of capitalism is competition, not profit making. The allure of profits generates competition. Competition drives innovation. Innovation drives cost cutting and lower prices. The end result is that customers end up paying less for better products. they are wealthier as a result. Along the way capitalists can make short term profits but not long term profits. The only way, in theory, that a capitalist can make long term profits is to innovate endlessly.

Defenders of banking argue that we have seen enormous innovation from the big banks. That is a shallow and failed argument. Innovation is not the creation of even more obscure legalese and fine print. Nor is it the creation of products that only exist to pad out bonus pools. The banking system is supposed to allocate capital effectively through the economy, and to provide a low cost and sound payment system so we can save and get cash reliably when we need to. As Volcker has said, the last big innovation in banking was the ATM machine. The plethora of murky and dubious securitized ‘products’ don’t count: they are simply variations on an old theme.

But, back to Obama.

The proposals have the right thrust. Capping bank size at 10% of the nation’s deposit base is a good start. There are a host of details yet to work out, and I imagine that the armies of lawyers Wall Street employ are already devising sinister schemes to dodge any new rules. Similarly putting a stop to ‘proprietary’ trading will be enormously difficult in practical terms since identifying such trading and separating it from trading undertaken on behalf of a customer is sometimes very difficult. [Proprietary trading is that done by a bank for its own profit rather than being done to satisfy a client need]. Besides, there is little evidence that proprietary trading contributed excessively to the banking melt down. The really big errors were made in securitization and the failure to understand elementary risks of things like sub-prime mortgages and commercial real estate loans. A final objection to a ban on proprietary trading is that banks use such positions to hedge their risks: do regulators really want to expose banks to excessive risk?

So the details will determine the success of the proposals. My approach as you know is much more blunt for exactly the reason that banks are very good at cheating and getting around rules. I know. I helped devise such schemes. Since I believe that creative bankers, lawyers, and accountants will always find ways to cheat – the financial incentive is too powerful for them not to try – then we need to accept that fact and act accordingly. We need to assume cheating and therefore insulate ourselves against the result.

The only way to do that is to limit our exposure to the banks.

To do this we need to force banks to play with their own money and not ours. One way to do this is to increase capital requirements way beyond where they are now. Entering the last crisis most of our banks met or exceeded current capital requirements so we know that such rules are not a solution by themselves. They do, however, limit the taxpayer involvement in a crisis. So start there.

Next we need to limit our insurance exposure. Some bank activities should be made clearly uninsured. Proprietary trading is a good example. We can do this by hiving off that form of banking into uninsured private banks – like the old time investment banks – and thus restricting our insurance to commercial or main street banks. We can limit the size of banks so that each bank failure does less damage. And we can raise the fees we charge banks for the insurance, so as to price properly for the privilege of using our insurance backstop. Naturally banks will raise prices to customers for any increase in insurance costs, but that will have the positive effect of dampening demand for bank services and slowing the industry down, which is not a bad thing at all.

The Obama proposals, based as they are on the Volcker recommendations, aim along these lines. As such they are a major step forward.

Are they enough? No. But they are a much better set of ides than the pablum being put forward by the Treasury Department or the Federal Reserve Board.

Which brings me to the politics of the proposals.

It is quite apparent that a shift in power within Obama’s advisory circles led to yesterday’s announcements. The ludicrous capitulation of the Democrats in Massachusetts obviously contributed to the hasty timing, but the infighting over bank reform had been going on much longer. Obama had originally asked for reform proposals on his desk by year end 2009. That didn’t happen and so he switched to plan ‘B’. I have already said that the winner of the switch is undeniably Volcker, and to a lesser degree Goolsbee at the NEC, the big losers are Geithner and Bernanke. Geithner because he fumbled getting a reform package organized last year, and Bernanke because he represents so much of the status quo.

Indeed the first victim of Obama’s shift in focus could well be Bernanke whose confirmation is now in the balance. As the Democrats try to reframe the political debate in reaction to the loss on Massachusetts and obvious and vulnerable target will be the banking industry and all those who apologize for its anti-social antics. Bernanke is front and foremost in that line. His recent defense of the Fed was all about limited action and new obscure rules to empower the Fed. A quiescent Congress might well have gone along with him. A chastened and newly populist Congress might not.

Geithner too is in trouble. He has openly opposed the Volcker style fix for banking, and has argued for incremental and more bureaucratic approaches. While he stood on the podium yesterday as the president made his statement, he was unusually pushed to the back behind the towering figure of Volcker.

So a shift for the better has taken place. There is an opportunity to get banking back in a box where it cannot do the damage it did. I was pleasantly surprised by the content of Obama’s announcement. I was particularly pleased by the evident influence Volcker has had. Now comes the tricky bit: getting the details worked out. But this time at least we are working from a strong position. The odds are much better that we will get something meaningful.

That’s change progress we can believe in.

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Obama and Banking: Another Bust?

The cynic in me wants to begin by asking: will he screw this one up as well?

But, I should think more positively and at least attempt to be pleased with the gruel the White House keeps packaging as gourmet food.

We cannot get into a discussion of the latest rumors about finance reform without at least commenting on the ridiculous election result in Massachusetts. So allow me to go there first with a rant – I promise I will keep it short!

It is frankly astonishing that the Democrats could be astonished. They screwed themselves royally. Their candidate was a complete twit and committed the full allowance of electoral mistakes. Her campaign should henceforth be held up as how to not to defend a safe seat. The irony is so vast: the Democrats and Obama screwed up health care reform by losing Teddy Kennedy’s seat. This would be the same Ted Kennedy who devoted his life to health care reform. Nice one Obama.

But the blame extends everywhere: the insipid performance of the Senate majority as it wandered through its self-absorbed and delusional debate over health care reform was both an insult to the people of America and a fiasco of political suicide. I have never been so aghast at politicians. The ridiculous and foolhardy outreach to Republican,s who had absolutely no intention of compromise, was a scene straight from a comic book: the president and his fellow travelers deluded themselves into believing that folks like Snowe and Lieberman were actually worth reaching out to. For what? They did not support health care reform in any shape, form, or way. They wanted to kill it from day one. So we were all condemned to watching the Obama frog be boiled. Apparently the only person unaware of his fate was Obama himself. His obsession with bi-partisanship will destroy him. Someone needs to tell him the simple rule: it takes two to compromise.

Maybe the truth is more simple: he doesn’t have any beliefs. He certainly was quick to give up on reform. Too quick in my book. There was no fire. No anger. No heavy leaning on waverers. No attempt to shape debate. All we got was a pallid and soft ‘reality checked’ view that we have to ‘reach out’ and water down so as to ‘get something’ done. Having sold us on the watered down version, the least Obama could do was get that Massachusetts win and assure that even the weak reform was passed. Instead he failed to be energized by the prospect of that loss. I have to conclude he wasn’t committed to reform in the first place.

Those who argue he had no choice are part of the problem too. Look what his vision has brought us: a diminished party presence, a diminished opportunity, and a diminished nation. Some change we can believe in.

Now what? having run away from all the big fights in 2009, what capitulation can we expect in 2010?

Well: finance reform.

Which ends my rant and begins the commentary.

The Wall Street Journal is reporting that Obama is going to announce, later today, measures that will significantly restrict the big banks. Notice that wording: ‘restrict’ not ‘reduce’.

In other words: here we go again.

Obama is congenitally unable to be tough. So instead of starting in a strong position and then working back to the middle compromise, he anticipates where the end will be and starts there. The obvious result is that he has to compromise from there and ends up giving into the opposition. That was the fate of health care and it could be the fate of bank reform.

We need smaller banks for two major reasons: one is that we simply cannot afford to bail out big banks anymore. The biggest banks are now so large that to bail them out would bankrupt the US Treasury. If not bankrupt, the damage would be so great that we would be severely limited in our fiscal policy options were we in another recession. Don’t forget that this last crisis began as a result of banking stupidity. The limited fiscal response – the weak stimulus – was conditioned by the fact we were already swimming in a sea of red ink courtesy of the Reagan-Bush years and the bank bail outs of 2008/2009. Had we been in a modest surplus, as we were at the end of the Clinton era, our response could have been more robust and the recession less damaging. People’s jobs were destroyed by our history of fiscal ineptitude stretching back to 1981.

The second reason we need smaller banks is competition. The record profits now being reported by the banks, in their trading accounts at least, stem in large part from the reduced competition in many fields of investment banking. Our entire banking system lacks sufficient competition to keep the big players honest. The suspicion of rigged markets and abnormal profits hangs over Wall Street because there are so few active players in the game. We need more, not fewer, banks. The quickest way to get more banks is to break up those we already have. It wouldn’t be the first time America has gone down that road.

The proposal Obama is expected to announce include negative incentives to discourage bank growth, and rules to reinstate the separation of investment and commercial banking. These are two very important actions needed to shore up the banking system, but already we can detect the Obama weakness.

Instead of proposing outright break up for the big banks – splitting them into two or three and breaking out their investment banking pieces as new organizations – the administration is simply proposing ‘rules’ and ‘regulations’ to achieve the same goal in a less aggressive manner.

This sounds like a slippery slope again.

The banks are already ramping up their formidable lobbying efforts. We can almost hear certain senators trembling at the thought of the money that will flow into their coffers if they suddenly find a reason to oppose anything too disruptive. The Federal Reserve Board opposes bank break ups as being unnecessary. Bernanke recently gave his opinion on the causes of the crisis: he attributed it to a lack of sufficient regulation, so he supports the creation of more rules as the preferred method for reform. Presumably he will make sure these rules are enforced – unlike the rules he didn’t enforce before. Larry Summers and Tim Geithner are too wedded to Wall Street to argue for anything radical. In fact, nowhere in the current corridors of power do I see an advocate of anything remotely like strong reform. Except for Paul Volcker perhaps.

We are ruled by timid or corrupt bureaucrats.

The analogy that springs to mind – in view of the health care mess – is of Neville Chamberlain and appeasement. I have a vision of Obama stepping off a plane waving a book of new rules and regulations, claiming to have reformed the banks, and having saved us from a new melt down. While in the background armies of lawyers and accountants trample through those same rules and regulations and reduce them to valueless garbage within hours of the ink having dried.

The risk of fighting tanks with paper is that tanks tend not to notice the paper. And the banks are acting like armies of tanks raging through the economy and pillaging it at will. They need to be blown up.

Fundamental reform is just that – fundamental. If we honestly believe the banks are too large then we should have the courage and foresight to make them smaller. We shouldn’t ‘suggest’, ‘guide’ or ‘ask’. We should force. Frankly force is the only language the banks seem to understand given their total disregard for the public as expressed in those annual bonuses they are handing out to themselves.

Of course we might disagree as to whether the banks are too large. In which case lets discuss that. The onus is on the banks to prove that they are not anti-socially managed or constructed. And yes I mean ‘anti-social’. I have read some commentators argue that the banks have no social responsibility and that their only goal is to make profits for their shareholders. That is true only in part, and even then the banks fall short.

As long as taxpayers are acting in bail out mode the banks have to take social claims against their behavior seriously. They are not solely beholden to private interests if social money is to be used at any point. Society has both a right and an obligation to interfere in bank management to ensure our money is being deployed wisely. Having smaller banks is one way to get such assurance.

Even if we don’t agree that society has an active interest in internal bank affairs, shareholders surely do. In which case we should ensure that shareholders actively participate in matters such as bonus policy. At the moment bank shareholders – and in particular the institutional shareholders like retirement funds – are far too passive. The idea that 60% of Goldman Sach’s revenue is syphoned off for pay and bonuses suggests that the managers have the upper hand against the shareholders. Imagine the retirement fund’s valuations if that revenue was passed on to the shareholders instead of being carved out for the employees. If your retirement fund has shares in Goldmans Sachs you should be wincing every time you read about those bonuses – its your money being paid out to those traders!

So what do we conclude?

The health care mess gives us little assurance that Obama has the character to take on an entrenched industry. He seems not to have the stomach for big political debates. Instead he is a bureaucrat and thinks that tweaking rules will ‘nudge’ the banks to do the right thing. Later today we will learn how he interprets the lessons of the Massachusetts election. Will he become even weaker? Will he trim even more to the right? Will he cave in more quickly to the powers that be?

The good news is that he appears to be taking that advice of Paul Volcker who has been an active advocate of braking up the banks. This may be a sign that the lesson learned was that the country needs strength at the top.

We can hope can’t we?

Hope … I seem to remember a presidential campaign in which that was a big word.

Doesn’t that seem a long time ago?

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Did The Banks Cheat or Break The Law?

My comment yesterday about Goldman Sachs dubious business practice of hedging against investments it was selling to investors seems to reflect a more widely held view than I realized – it popped up in Gillian Tett’s normally sober commentary in the Financial Times today..

Recall the issue: in the fairly narrow confines of the mortgage backed securities market it appears as if banks like Goldman – and I should point out that all the ‘big six’ seem to have been just as unethical – peddled securities and then, simultaneously, took out insurance against the loss of value in them. To say this is dubious is to give the banks a big free pass.

The plot thickens when we also recall that the insurance was often in the form of a credit default swap provided by our favorite government agency – AIG. Before it jumped into the taxpayers arms for help that is.

So: the super smart folks at Goldman, those titans of risk management and earners of mega millions, shoveled toxic investments onto other banks and investment companies like pension companies, and then turned around and bought insurance against the value of those investments. Just in case the value dropped. Not that they had any suspicion such a drop would happen … heavens no. Just in case. Well, just in case.

Blankfein’s avoidance of giving a straight answer when questioned about all this yesterday tells it all.

There’s something fishy yet to come out.

Couple this with the scandal brewing over the way in which AIG’s counter-parties were hastily reimbursed for any potential losses they could have suffered on the CDS’s they had bought from AIG, and we begin to smell a cover up. Or at least a monumental screw up. A lot of people, and not just Republican mischief makers, want to know why the Fed bailed those counter-parties out at face value and not at some reduced rate. Other insurers, like Ambac and MBIA, faced the same difficulties as AIG, and their counter-parties were forced to accept a big haircut. Why not AIG’s? I will give you a hint: Goldman had no business with either Ambac or MBIA. How about another hint: the chairman of the New York Fed is a Goldman Sachs person.

The point is this: banks buy CDS coverage or sell investments short all the time. This is no big deal when the investments in question are traded on open and easily accessed exchanges: everyone, including buyers of the investments can see who is doing what, and at what price. ‘Caveat emptor’, which is Blanfein’s defense, is appropriate.

But the market for those huge mortgage backed security packages is neither open nor easily accessed. It is tightly controlled and full of very murky, opaque transactions. They’re not called ‘dark pools’ for nothing. It is in this very private, and not at all public place, that Goldman and others were playing when they took out their AIG insurance. So for Blankfein to decry critics by saying that the buyers of Goldman’s toxic waste knew full well what they were getting into holds much less water than a similar claim would in a different market.

So the point becomes even more sharply focused: was that market rigged? Did Goldman [and the others] know the market was rigged? Did they understand that the investments they were selling would drop in value the instant they were sold? Was that knowledge the motivation for buying the insurance? Why did the Fed cover this all up by bailing out Goldman and the other counter-parties at 100% on the dollar?

Is this all legal?

I usually don’t fall for the paranoia that inevitably lurks beneath stories like this, but in this case the evidence is beginning to pile up. It looks very much as if the markets in which some very big and dodgy deals took place were biased sufficiently that we should properly call them rigged. At the very least we need to know why it was Goldman deserved to be paid out in full – from taxpayer money – rather than take a haircut. After all, using Blankfein’s own words: the investors playing in these markets are ‘big boys’, they should know the deal. They are responsible for doing their own homework. Especially in these murky markets.

So why, suddenly, is Goldman an exception to its own rule? Is it not a ‘big boy’?

Our focus on this episode would be lessened if it were not for the extraordinary sight of the self congratulation and self-adoration that now infects Wall Street just a year later. These people genuinely think they have ‘earned’ those bonuses.

From a rigged game?

Stay tuned.

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Man Lands on Mars: TBTF Again

Well not exactly. But close. The feeling of exhilaration and adventure that surely would accompany such an event is exactly the feeling I experienced when I read that a session at this year’s annual American Economics Association actually discussed something relevant to the economy. Wow. That’s big.

The discussion in question was one concerning the big banks and specifically the, by now, old chestnut of ‘too big to fail’.

The reason I bring this to your attention is that Tom Hoenig, who is President of the Kansas City Federal Reserve bank, went much further than he has in the past by advocating that we break up the big banks. He is now becoming both more consistent and vocal in his advocacy. His comments to the AEA meeting were positively rebellious.

The momentum is building. With Paul Volcker still beating the ‘break them up’ drum, and with others beginning to come on board, there is now a glimmer of optimism that we may actually be able to make progress in our efforts to limit the damage the big banks can do whenever they go insane again – presuming that they are not already headed that way.

This is not a trivial issue and is one we all ought to be concerned with.

Of all the potential sources of instability in the economy big finance heads the list. It is inherently an unstable activity subject to violent swings of fashion, especially given its anti-social compensation structure which is specifically designed to channel cash from shareholders and the public into the pockets of executives and traders. I reported yesterday that this inherent instability has been thoroughly discussed by Hyman Minsky who was a more ardent Keynsian than Keynes himself. Minsky’s basic notion is that as the economy rewards bankers for extending credit – during the initial stages of a recovery – it encourages them to take on more risk. This extra risk is justified at first because the economy is robust and borrowers are well capable of repayment from the profits of their businesses. Unfortunately as growth continues this success allows borrowers to over extend themselves, and they enter what Minsky called the Ponzi finance period of growth, where money borrowed was being used to repay earlier loans because profits were not sufficient. Eventually, of course, some borrowers default and the conditions are in place for a credit crisis.

This story should sound familiar.

Minsky’s work has long been marginalized in economics because of his association with Keynes. So his analysis is not taught at any of our best universities, just as Keynsian economics is not taught. This incredible memory loss is just one aspect of the astonishing foolishness we nowadays call the economics profession. Economists are much more concerned with the study of economics than with the study of real world economies. That might sound nuanced or bizarre but it contributes to our everyday crisis. Economists are extremely ill-equipped to tackle real world situations. This is because the textbooks just don’t include much by way of real world examples. I challenge you all to look up the word ‘bank’ in the table of contents of a standard micro-economic text. It isn’t there.

Banks as business firms do not occur in economic theory. I talked about why yesterday: economists have avery peculiar view of money. In fact they ignore it as an economic factor except for its role in inflation and the separation between ‘nominal’, i.e. real world, prices and ‘real’, i.e. inflation adjusted prices.

As you imagine, therefore, it can be quite a shock to see a whole bunch of economists talking about the banking crisis as if they had any clue. To be fair there are a ton of economists who have worked in banking and therefore are quite capable of such a discussion. My point is that to gain that experience they have to ignore or unlearn what they learned of economic theory. They are flying by the seat of their pants.

Meanwhile back to Hoenig:

Breaking up the banks is the only viable policy that would guarantee a more manageable social cost in future bail outs. The social benefit of maintaining the FDIC safety net is too large for us to give it up, and, likewise, we are not likely to want our largest banks to go belly up without our having an orderly way to push them through rapid bankruptcy. The cost of economic disruption far outweighs the reduction to the so-called ‘moral hazard’ of our safety net that so vexes right wing politicians and economists.

So we are stuck. We want to keep the safety net because, in aggregate, it protects all of us. At the same time we want to lower its cost, which this time around was enormous.

The best way to accomplish these two contradictory goals is to make sure that each time a bank fails it cannot be so large we have no choice but to bail it out. We need smaller banks plus a quick bankruptcy wind up method.

Add in the re-establishment of the separation between gambling and basic banking – by bringing back some form of the New Deal era Glass-Steagall Act – and we are well on our way to getting banking back to being both boring and safe. Which is where it should be.

Will we get there?

The odds are still against it. With corruption rife in Congress, and with bank lobbyist money flowing into Senatorial pockets, the voice of the public is not easily heard. Still money talks, and the banks just blew through a wad of taxpayer money. Someone down there must have noticed. Let’s hope that offsets the natural inertia of our favorite gentleman’s club.

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