Too Big To Fail

How to deal with the fact that banking is now an oligopoly, with four banks holding the majority of deposits:

REPEAL RIEGLE-NEAL AND BAN INTERSTATE BANKING ONCE AGAIN.

In 1927 the McFadden Act made it illegal for national banks to operate across state lines, a prohibition strengthened in 1935 with the Banking Act of 1935. The goal was to insure that no bank got big enough that it could threaten the financial system of the entire United States, and it worked. This system remained in place until it was repealed in 1994 by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.

So what happened after that? Well, the biggest banks, having enormous capital to work with, went on an acquisition spree. One of my former employers was on the board of directors of a community bank that was bought up by one of these huge banks. He said their modus operandi was simple: They would come in and pay the members of the board of directors a huge amount of money to be employees for a certain amount of time of the national bank in order to "facilitate the consolidation", then the board of directors would vote to sell the bank to the national bank for generally an amount somewhat less than its true value. The national bank would then swoop in, loot all the assets, and use that to buy up the next community bank in their list of acquisition targets, finally resulting in what we see today: looking at FDIC reports and bank asset reports, I calculate that the top four banks have 61% of U.S. deposits, and truly are too big to fail.

So you say, "why not just let them fail anyhow? Nobody is too big to fail!" Well, banks are special in that they create and destroy money via the operation of fractional reserve lending. If they collapsed, 50% of U.S. money would simply evaporate -- poof, like ghosts in the wind, leading to an unstoppable deflationary spiral creating a Great Depression that would make the one of the 1930's look only like the "sort of bad depression, in a minor sort of way" and an end to capitalism as a viable system of organizing society. That might sound good, but command economies have a poor record over time, history shows, and we don't have any record of a viable industrial economy based on any other system other than command or capitalism. The natterings of anarchists of either the socialist or anarcho-capitalist variation simply don't scale to the size needed for a modern economy. It requires over $2.5 billion in capital to build a modern semiconductor foundry... only capitalism or a command economy has thus far proven capable of accumulating sufficient capital (either via market operations, or by commanding capital to move) to do something of that scale. And the failure of the Soviet Union should tell you just how effective a command economy is at that long-term... i.e., not very.

How to deal with this? Well, if we repeal Riegle-Neal, we then require all interstate banks to split up into 50 individual banks. All deposits and assets and liabilities associated with facilities in a particular state or by residents in a particular state will go to that individual state's bank. Credit card customers in a particular state for example would be assigned to Bank of America-Kansas or whatever. The end result would be much smaller banks, some of which would be bankrupt but the majority not. And because banks would now be headquartered in the actual states where they operated, they would be more in tune with the needs of their particular state and more able to respond to local needs rather than with all policy being dictated from some corporate headquarters a long, long ways away.

Will it happen? Of course not. We have achieved regulatory capture in a way that the railroads and banks of the robber baron era of 130 years ago only dreamed about. All major policymakers have a stake in making sure that the repeal of Riegle-Neal doesn't happen, they're all bankers who participated in passing Riegle-Neal and the takeover orgy that followed it. Congress is bought and sold. And the American people seem to not care at all, or shrug their shoulders and say "there's nothing to be done." But of course, it COULD be done. If we wanted it. If we demanded it. If we marched on our Congressman's offices and told them to do it. If we voted them out if they didn't. But as long as people keep voting the same bastards into office year after year, or their clones from the other party, you'll continue seeing SNAFU: Situation Normal, All F**ked Up.

-- Badtux the Banking Penguin