Too Big to be Restructured

Joseph Stiglitz:

America’s socialism for the rich: Corporate welfarism, by Joseph E. Stiglitz, Commentary, Project Syndicate:  …America’s banks are pushing back on efforts to regulate them … The old system worked well for the banks (if not for their shareholders), so why should they embrace change? …

It has long been recognized that those America’s banks that are too big to fail are also too big to be managed. That is one reason that the performance of several of them has been so dismal. …

The Obama administration has, however, introduced a new concept: “too big to be financially restructured”. The administration argues that all hell would break loose if we tried to play by the usual rules with these big banks. …

I think this judgment is wrong. I think the Obama administration has succumbed to political pressure and scare-mongering by the big banks. As a result, the administration has confused bailing out the bankers and their shareholders with bailing out the banks.

Restructuring gives banks a chance for a new start: new potential investors … will have more confidence, other banks will be more willing to lend to them, and they will be more willing to lend to others. The bondholders will gain from an orderly restructuring, and if the value of the assets is truly greater than the market (and outside analysts) believe, they will eventually reap the gains. …

Rewriting the rules of the market economy – in a way that has benefited those that have caused so much pain to the entire global economy – is worse than financially costly. Most Americans view it as grossly unjust…

By contrast, the United States has provided little help for the millions of Americans who are losing their homes. Workers who lose their jobs receive only 39 weeks of limited unemployment benefits, and are then left on their own. And, when they lose their jobs, most lose their health insurance, too.

America has expanded its corporate safety net in unprecedented ways, from commercial banks to … automobiles, with no end in sight. In truth,… this is an extension of long standing corporate welfarism. The rich and powerful turn to the government to help them whenever they can, while needy individuals get little social protection.

We need to break up the too-big-to-fail banks; there is no evidence that these behemoths deliver societal benefits that are commensurate with the costs they have imposed on others. And, if we don’t break them up, then we have to severely limit what they do. They can’t be allowed to do what they did in the past – gamble at others’ expenses.

This raises another problem with America’s too-big-to-fail, too-big-to-be-restructured banks: they are too politically powerful. Their lobbying efforts worked well, first to deregulate, and then to have taxpayers pay for the cleanup. Their hope is that it will work once again to keep them free to do as they please, regardless of the risks for taxpayers and the economy. We cannot afford to let that happen.

I agree, particularly with the last few paragraphs.


Originally published at Economist’s View and reproduced here with the author’s permission.