TOS Blog: Daily Commentary from an Objectivist Perspective

End “Too Big to Fail,” not “Too Big” Banks

Senator Sherrod Brown (D) has called for breaking up America’s biggest banks. His Safe, Accountable, Fair & Efficient (SAFE) Banking Act would ostensibly “end ‘Too Big to Fail’ policies” while placing allegedly “sensible size limits on our nation’s large financial institutions.”

Brown had previously teamed with Senator David Vitter (R) in a letter to the GAO requesting a study to “examine ‘the economic benefits that bank holding companies with more than $500 billion in assets receive as a result of actual or perceived government support,’” such as whether “having TBTF [“too big to fail” protection] guarantees gives large investment institutions sizeable advantages over rivals, especially in lowering their borrowing costs.” Their bill to that effect recently passed the Senate.

George F. Will endorses Brown’s approach of bank-busting, and urges conservatives to do likewise:

By breaking up the biggest banks, conservatives will not be putting asunder what the free market has joined together. Government nurtured these behemoths by weaving an improvident safety net, and by practicing crony capitalism. Dismantling them would be a blow against government that has become too big not to fail.

But Will is pointing conservatives toward a statist trap.

Will notes that there is “no convincing consensus” about what size a bank should be. Will also notes that Brown himself “is undecided about whether the proper metric for identifying a bank as ‘too big’ should be if its assets are a certain percentage of GDP—he suggests 2% to 4%—or simply the size of its assets.” Brown’s uncertainty, however, didn’t restrain him from imposing strict limits on banks’ size in his SAFE act.

How can anyone determine which successes or failures of a given bank are consequences of “Too Big to Fail” policies and which are consequences of free-market phenomena and wise or unwise policies on the part of the bank’s management?

Government has no right to dictate the size of any bank (or any other business). And if government is granted the power to limit the size of banks, what will be the implications for other industries and businesses? As Will acknowledges, “banks are not the only entities designated TBTF,” noting General Motors was bailed out based on the notion that it is “systemically important.” Will the government be free to limit the size of automobile makers? Computer makers? Insurance companies? News outlets?

In a free market (as opposed to today’s highly regulated market), a bank grows by offering services for which clients are willing to pay and by maintaining financial strength—all of which, in turn, increasingly attracts depositors, borrowers, and investors. Since there are no special economic advantages like the TBTF “safety net”—or what Will eloquently calls “the pernicious practice of socializing losses while keeping profits private”—a bank can never grow “too big.” If the bank continues to offer marketable services and to maintain financial strength, then, for its customers and stockholders, the bigger it grows the better. If the bank’s quality and strength begin to deteriorate, then its customers will complain or move their business elsewhere, and its management and stockholders will have to make some rational decisions about how the bank will proceed. Absent someone engaging in fraud or the like, government has no role in any of this.

SAFE is an immoral intrusion into the voluntary association of banks and their customers. Advocates of liberty must oppose any government role in determining the size of banks. We must fight to repeal all such rights-violating policies and agencies, and to establish fully free markets in banking.

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Creative Commons Image: Keith Allison

Posted in: Regulations

Comments are welcome so long as they are civil.
  • Anonymous

    How ’bout this: Gub’mint inflates private entities beyond mkt. forces, or it suppresses them below what mkt. forces would be. U.S. banks have been inflated; U.S. auto cos. were suppressed (don’t bother reminding me how big they got anyway, irrelevant). Pull the pin on the banks, let’em get as small or big as they will by the mkt. If that means yanking money back outa them that gvt. pumped into them, and properly disposing of that money, ok. Do the same with the auto cos., let’em get as big or small as they will by the mkt.

    BUT, WITH THE AUTO COS., I SAY, MAYBE THAT MEANS THE GVT. WAS OBLIGATED, ALL BUT DUTY-BOUND, TO ‘BAIL’EM OUT! AND THEY SHOULDN’T HAVE TO PAY BACK ONE PENNY! IN THIS CASE, I SAY TO THE TAXPAYER, “TOUGH!” The gvt. inflicted perpetual bleeding on them in the 1930’s, thru terrorist proxies, not defending their prop. rights like gvt.! does. Gvt. was, & is, a crook, instead. What taxpayer has EVER said, “Peep.”? None. Guess why not. The auto cos. couldn’t cope with it after 2008. I DON’T BLAME’ EM! They DESERVE restitution.

    Ayn Rand took S.S. ‘pension’ as restitution. I don’t blame her. I take it now. On THIS score, I say, as an Objectivist and a person of reason, “Hell with the taxpayer.” They still love it. They damned me in the past, when I bitched about it. They ain’t changed, so, hell with’em. I take restitution. The U.S. auto cos. deserves it, and should take it, and return to the mkt.

  • Anonymous

    Brilliant column. The neocons are the sole force behind this idea on the right. Their (anti)American Enterprise Institute is the think tank that is moving this idea. The few people on the right who think this is a good idea were convinced by the neocons. This idea is a natural extension of their unprincipled, go-with-the-political-flow-of-events ideology, but I think a secondary goal is to make the Tea Party become less popular by being seen arguing for the rights of bankers, while losing resources fighting it. It is Machiavellian method to the core.

  • Anonymous

    And–the reason neocons believe they can get away with it is that they believe that conservatives are secretly and unadmittedly racked with envy of the rich, too. Neocons are counting on the right to respond to have major holes in their integrity and respond to this issue with emotion.

  • Friend of John Galt

    Any company should grow to whatever size it can without government interference. As it happens, I bank at one of the top 5 banks — and I was immensely pleased when it was selected to be a “white knight” in taking over a failing bank that gave it a full 50 state presence. At the time, I was traveling extensively in an RV — and access to “my” bank in any state was a great convenience.

    Of course, the bank(s) should not be interfered with to prevent it from following appropriate practices to avoid financial failure in tough times — something that the Government Regulators have intervened frequently to force dangerously imprudent practices for political reasons time and time and time again.

  • Friend of John Galt

    As for the automobile companies — the government intervention was a huge payoff to the unions who helped elect Obama. Had the failing automobile companies passed through the normal bankruptcy procedures, then creditors (many of whom were stiffed by the government) would have gotten paid off based on the position and legitimacy of their claims. The unions would have faced a bankruptcy court supervised revision of their contracts (which was the political cost that Obama did not wish to bear) as they deserved and the uneconomic practices caused by these union contracts would have been resolved. As it is, the union contracts continue on and will eventually cause the failure of the U.S. automobile industry.

  • Friend of John Galt

    As for the automobile companies — the government intervention was a huge payoff to the unions who helped elect Obama. Had the failing automobile companies passed through the normal bankruptcy procedures, then creditors (many of whom were stiffed by the government) would have gotten paid off based on the position and legitimacy of their claims. The unions would have faced a bankruptcy court supervised revision of their contracts (which was the political cost that Obama did not wish to bear) as they deserved and the uneconomic practices caused by these union contracts would have been resolved. As it is, the union contracts continue on and will eventually cause the failure of the U.S. automobile industry.