o the irony seems to be that the central powers of world capitalism have made themselves indispensable (and a huge threat and burden for the world economy) by morphing into a socialist entity as regards their relationship with the U.S. government. My perspective for watching and trying to understand the global economic crisis and its results is as an historian and theologian, and so I find myself particularly interested in the ethical aspects of it all: particularly in how a small group of people manipulating legal loopholes for maximum profit could have created a global disaster in playing with the U.S. housing market. We create these laws and these institutions, and we also choose how to regulate these institutions: we choose, ultimately, what they can get away with. And when those creating vast wealth for themselves use part of that wealth to influence laws to be further oriented in their favour, well, then it's no great surprise if the machinery runs away from us.
But I have to find it sadly humorous to see those who most champion "capitalism," "competition," "free markets," and "deregulation" (as a way of getting rid of bad, "socialist" tendencies in our government impeding business and therefore the good of the public as a whole) happily create an utterly socialist reality for themselves at the very center of the American financial world. It is, ultimately, what the competitive urge in a capital economy will do: create a situation of maximal profit for itself, even if it is supposedly in ideological conflict with its own values. Because it's not the values or the ideology of "capitalism" itself that's driving most people of this sort: it's just the desire for maximum profit and security, and whether that be by actual capitalism or actual socialism is beside the point.
After the collapse, I heard a number of philosophers talking about how now
, at least, for a generation, we could hope, people at the universities would take Business Ethics courses seriously, since we had an entire global economic crisis occur through something as basic as greed. It was, they supposed, the ultimate trump card: the example that would cement in people's minds the crucial reality of the need for ethics in business in order to keep the whole of the economy functioning. But that pesky doctrine of Original Sin is in there, too: people have a tendency, or a disease, toward evil choices, and since our "reform" leaves the same people in charge of the economy (and the reform, I suppose), it probably isn't too great a surprise to see the "more of the same" aspect of Mr. Hoenig's interesting essay here.Op-Ed Contributor
Too Big to Succeed
By THOMAS M. HOENIG for The New York Times
Published: December 1, 2010
Kansas City, Mo.
THE world has experienced a severe financial crisis and economic recession. The Treasury and the Federal Reserve took actions that saved businesses and jobs and may very well have saved the economy itself from ruin. Still, the public seems ungrateful, expressing anger at these institutions that saved the day. Why?
Americans are angry in part because they sense that the government was as much a cause of the crisis as its cure. They realize that more must be done to address a threat that remains increasingly a part of our economy: financial institutions that are “too big to fail.”
During the 1990s, Congress, with encouragement from academics and regulators, repealed the Glass-Steagall Act, the Depression-era law that had barred commercial banks from undertaking the riskier activities of investment banks. Following this action, the regulatory authority significantly reduced capital requirements for the largest investment banks.
Less than a decade after these changes, the investment firm Bear Stearns failed. Bear was the smallest of the “big five” American investment banks. Yet to avoid the damage its failure might cause, billions of dollars in public assistance was provided to support its acquisition by JPMorgan Chase. Soon other large financial institutions were found to also be at risk. These firms were required to accept billions of dollars in capital from the Treasury and were provided hundreds of billions in loans from the Federal Reserve.
In spite of the public assistance required to sustain the industry, little has changed on Wall Street. Two years later, the largest firms are again operating with bonus and compensation schemes that reflect success, not the reality of recent failures. Contrast this with the hundreds of smaller banks and businesses that failed and the millions of people who lost their jobs during the Wall Street-fueled recession.
There is an old saying: lend a business $1,000 and you own it; lend it $1 million and it owns you. This latest crisis confirms that the economic influence of the largest financial institutions is so great that their chief executives cannot manage them, nor can their regulators provide adequate oversight.
Last summer, Congress passed a law to reform our financial system. It offers the promise that in the future there will be no taxpayer-financed bailouts of investors or creditors. However, after this round of bailouts, the five largest financial institutions are 20 percent larger than they were before the crisis. They control $8.6 trillion in financial assets — the equivalent of nearly 60 percent of gross domestic product. Like it or not, these firms remain too big to fail.
How is it possible that post-crisis legislation leaves large financial institutions still in control of our country’s economic destiny?
One answer is that they have even greater political influence than they had before the crisis. During the past decade, the four largest financial firms spent tens of millions of dollars on lobbying. A member of Congress from the Midwest reluctantly confirmed for me that any candidate who runs for national office must go to New York City, home of the big banks, to raise money.
What can be done to remedy the situation? After the Great Depression and the passage of Glass-Steagall, the largest banks had to spin off certain risky activities, and this created smaller, safer banks. Taking similar actions today to reduce the scope and size of banks, combined with legislatively mandated debt-to-equity requirements, would restore the integrity of the financial system and enhance equity of access to credit for consumers and businesses. Studies show that most operational efficiencies are captured when financial firms are substantially smaller than the largest ones are today.
These firms reached their present size through the subsidies they received because they were too big to fail. Therefore, diminishing their size and scope, thereby reducing or removing this subsidy and the competitive advantage it provides, would restore competitive balance to our economic system.
To do this will require real political will. Those who control the largest banks will argue that such action would undermine financial firms’ ability to compete globally.
I am not persuaded by this argument. History suggests that financial strength follows economic strength. A competitive, accountable and successful domestic economic system, supported by many innovative financial firms, would restore the United States’ economic strength.
More financial firms — with none too big to fail — would mean less concentrated financial power, less concentrated risk and better access and service for American businesses and the public. Even if they were substantially smaller, the largest firms could continue to meet any global financial demand either directly or through syndication.
Crises will always be a part of our capitalist system. But an absence of accountability and blatant inequities in treatment are why Americans remain angry. Without accountability, we cannot hope to build a national consensus around the sacrifices needed to eliminate our fiscal deficits and rebuild our economy.Thomas M. Hoenig is the president of the Federal Reserve Bank of Kansas City.
A version of this op-ed appeared in print on December 2, 2010, on page A37 of the New York edition.