If banks are too big to fail

The problem is that banks as presently constituted serve two distinct, and conflicting purposes:

1. They serve as safe storage and utilization for liquid assets — checking and savings deposits (personal and business), which are traditionally leveraged for relatively low-risk loan activity for homes, cars, business expansion, etc.  That's called retail banking.

2. They serve as major investment brokers, where massive assets (individual or group) are leveraged for larger, higher-risk gains. That's called investment banking.

The problem comes where the assets of #1 — which are a critical to the citizenry as  whole — are used as the foundation for #2 — which are high-profit, and high-risk, activities.

There used to be a pretty big firewall between #1 and #2, 1933's Glass-Steagall Act, which institutionally separated companies doing #1 from also doing #2.  That lasted until the Go-Go 90s when the banking industry finally convinced Washington that such separation of functions (and risks) was totally unnecessary because profit was growing like a giant bubble that would never burst.  (And, yes, both parties, including a Democratic president, were part of that bubbly decision.)

And, of course, the #2 bubble burst, and suddenly the foundation of most people's assets — #1 —  was at risk.  Hilarity and massive bail-outs ensued.

Drawing that bright line between traditional retail banking and investor banking remains a critical, and still unaccomplished, need for the country.  Retail banking could be nationalized or treated as a public utility, but it can also be run effectively and safely as (as in the past) as highly regulated private businesses if those assets aren't available for casino games by rich investors (individual or institutional).

I wouldn't want to see the investment banking side of the house run as a public utility, because it should be high risk, and high reward, because that in turn can have great value in expanding the economy and growing overall wealth.  But that risk needs to be real and borne by the individuals and institutions directly involved, not socialized out to the public ("If I win, I get the profit; if I lose, the government bails me out").  Investment banks need to be small enough — or isolated enough — to fail, and what institutional money can be put into them needs to be controlled (personal investors? sure, with disclosures of risks.  pension funds? no.).

So, no, I don't want to see banks as a public utility — but if it was a choice between that and letting high-rollers treat my savings account as chips on their table, safe in the assumption that any losses will be covered by the taxpayers … well, that utility options suddenly becomes a lot more attractive.

Reshared post from +Mary McD

Touche'