Too Big To Fail

As I have been watching the debates about financial regulatory reform I find myself wondering how so many people can be missing the whole point. Both Treasury Secretary Tim Geithner and Federal Open Market Committee Chairman Ben Bernanke are trying to determine how to handle an orderly bankruptcy of any firm that is determined to be too big to fail. The reasoning behind to big to fail does make sense. If a Broker Dealer or Bank is bankrupt should the government let that bank go out of business if it means that other financial institutions will also fail triggering a domino effect eventually destroying our financial system. In 2008 and 2009 I think that the government made the right choice to stop a complete financial collapse. The government has backstopped far more then the AIG Balance sheet for 180 Billion or TARP for 700 Billion or even the stimulus for 787 Billion. Our Government has backstopped the commercial paper market for short term government loans which is a FIVE TRILLION DOLLAR MARKET. MSNBC's Dylan Ratigan has added up the figures and claims that in the past 2 years the government has backstopped TWENTY TRILLION DOLLARS. I mean the Citigroup portfolio alone was THREE TRILLION DOLLARS.

The question that regulators should be asking is what can we do to unravel these hugely complicated financial systems now to make sure that no financial institution contains systemic risk. If there are financial institutions that threaten the United States economy they should be broken up. Nothing within the United States should challenge the supremacy of the federal government. In some ways these systematically important financial institutions pose more risk to Americans safety then foreign powers. A complete collapse of the financial system which would lead to a collapse of the US Dollar (which we are beginning to see now as evidenced by the rise in Gold prices as a potential alternative to the Dollars reserve status) would destabilize the world which could easily lead to more violence. But I digress. So how can we make these institutions smaller? Easy, Bring back Glass Stegal which separated Broker Dealers from banks and reduced some moral hazard. By ensuring that Banks could not invest their depositors money which meant the size of the asset bubble that could be created by broker dealers was much smaller. Without the banks deposits the Broker Dealer/ Bank hybrids like Citigroup could not have lost as much money and created a systematic risk for the economy. We could also use anti trust laws. I know, people will say "were is the monopoly" there are multiple companies. The problem is that these financial institutions were acting together which created ologopolistic behavior. There was no efficient market functioning. Republicans who are PRO MARKET should be against this perverse ologopolistic behavior and failure of markets. I hope republicans get there soon.