Fmr. Secretary of Labor: Government should break up the banks!

If you are 1) Over twelve years of age, 2) Have a pulse, and 3) Are not a vegetable, then you are probably aware that the government gave huge bailout packages to struggling banks in the recent past. The argument we were pitched, the same argument used to socialize bailout the auto industry, is that these banks were “too big to fail”.

The idea that any private entity should be safe from failure is an affront to any red blooded capitalist. Strangely enough Robert Reich, a professor at Berkeley, agrees with me that this is a bad thing, and what’s more he has a plan. Because he is so much intelligenter than little ol’ me, I’m sure this plan will involve elegant sweeps of logical thought that move with breathtaking precision. Here it is:

The government should break up the banks.

Wait, what? Once I stopped projectile vomiting on my monitor I read on.

” A fight is brewing in Washington -- or, at the least, it ought to be brewing -- over whether to put limits on the size of financial entities in order that none becomes "too big to fail" in a future financial crisis... the danger of an even bigger cost in coming years continues to grow because we still don't have a new law to prevent what happened from happening again. In fact, now that they know for sure they'll be bailed out, Wall Street banks -- and those who lend to them or invest in them -- have every incentive to take even bigger risks. In effect, taxpayers are implicitly subsidizing them to do so. (Haldane figures the value of that implicit subsidy to be about $60 billion a year for each big bank.)" [Emphasis mine]

In case your brain was still trying to crawl out of your ears after reading the title of his argument, I’ll break it down for you.

Issue: Government bailed out banks that were failing because they were “too big to fail”.

Note there are two components to this issue. One: The government bailed out banks. Two: The banks were supposedly “too big to fail”. Nobody argues these two points. Enter the assumption, and exit all logical and reasonable though:

Assumption: Banks can be certain of future bailouts, because the government will always do this in future. In other words, Issue part 1 is an immutable Law of the Universe.

Solution: Therefore, we need to stop the “too big” part by making banks smaller.

As with many arguments the fault is not necessarily in the argument itself, but in its assumptions. Simply having assumptions is not necessarily a bad thing. Indeed, it is very difficult to have any sort of opinion on anything without throwing an assumption or two in there somewhere.

So much of what Robert has to say could be coming out of my own mouth. The bailouts have encouraged terrible behavior by essentially subsidizing companies that performed badly. The failure of large banks is difficult to swallow for the economy. What Robert proposes to fix the problem, however, is sort of like this:

Dr. Reich says our patient, who for the sake of the story is named The Econ Omy, has an iron deficiency, and is suffering fatigue as a result. Dr. Reich tells Mr. Omy that his solution is to pump Mr. Omy with caffeine to eliminate the fatigue. This makes sense if you assume the only treatable problem is the fatigue, and that the iron deficiency is impossible to rectify. Fortunately you, the witness to this discussion, are not a moron, so you do what any reasonable person would do and punch the doctor in the throat.

The reason bankers are now licensed to be even more reckless is because they can rest assured that more bailouts are coming. The easiest, most simple, and least expensive method of stopping this bad behavior is for the government to get the #$^% out of the way and let the market work by killing bad businesses! If the bankers saw that bailouts were not, in fact, forthcoming and that risky behavior would lead directly to them being broke, they will either A) Fix said behavior, solving the problem, or B) Go bankrupt, no longer influence events, which solves the problem.

The market is designed with an excellent safeguard against poor decisions: The very real certainty of failure. Of course having a titan of any industry fall to the ground will cause earthquakes throughout the market. It will be painful. But more importantly, it will be temporary.

Would such a failure cause people to lose jobs, lose money, lose homes, etc.? Of course. Those are facts of life. Not everyone can succeed all the time. Losses are going to happen. These losses are something like small wildfires in forests. They clear out the dead growths, the weak plants, which otherwise would choke out all life around them. They burn early and often, so while every fire is painful, no one fire can kill the forest.

Forget the fact that to grant the government the authority to determine when a private entity (that is not a monopoly) should stop growing is a reckless maneuver that pisses away liberty. Forget that granting them this power is a dangerous precedent that points directly towards the government determining how much money Microsoft, Wal-Mart, and Mom & Pops Widget Store should make. If we do not allow the burning to happen periodically, if we step in and save every Tom, Dick, and Larry who falls on his face, then all we do is allow the dead brush to build to dangerous levels so that when the inevitable failure does happen, and there is nothing to we can do to stop it, it unleashes an inferno that will consume everything in its path without mercy.

Sometimes, you just have to let it burn.