Friday, September 18, 2009
Looking for the right size
Seattle Times: President Obama warned investment bankers Monday that if they engage in “reckless behavior and unchecked excess” again, the Treasury will not “be there to break their fall.” These were fine words, and surely represent the hopes of the American people. But a promise is not enough.
A year ago, when the crisis hit, there was no system for stabilizing the investment banks. Treasury Secretary Hank Paulson had to make it up as he went along. If nothing is changed, and crisis happens again, Secretary Tim Geithner will have to do the same thing.
The president is proposing changes, including some good ones. He wants a Consumer Financial Protection Agency to impose rules on such products as mortgages. This agency should not have the power to design every lender’s products, but it should have a procedure to define certain ones as unacceptable, and ban them.
What might have been
If such an agency had existed five years ago, much of this disaster might have been avoided.
President Obama also wants to give the Federal Reserve power to supervise companies, of whatever type, that pose a risk to the system as a whole. This is reasonable and necessary. There needs to be examination not only of Company A and Company B, but how A connects with B. The financial industry is an ecosystem, not a row of potted plants.
A further idea is that lenders of a certain size put up a higher percentage of capital, or follow more rules, than their smaller competitors. This may not be enough. Congress should consider the more radical solution: If a company is too big to fail, break it up.
A capitalist economy cannot work without allowing failure. Failure frees up assets and workers for new ventures, which is good, but if too much of the system fails, the whole thing goes.