How the Current Refusal to Deal Harshly with Failing Banks and Their Executives Will Create an Even Bigger Crisis — Yves Smith

Your humble blogger has been saying that the new bank rescue scheme, which is a covert backstop of nearly all uninsured deposits, is a disastrous extension of government support to institutions that are welfare queens save for executive and manager pay levels. And the Fed may make banks’ “Heads I win, tails you lose” bet even bigger by announcing that all deposits will be guaranteed.

We’ve argued since the crisis that banking is the most heavily government subsidized industry, far outstripping the military-surveillance complex in the support it gets from the great unwashed public. Yet every time banks predictably drive themselves off the cliff, they get even more goodies, with virtually nada in the way of new restrictions or punishment of miscreants. The US is keen to perp walk Donald Trump, but not bank executives.

Aside from the long-overdue need to prosecute more bankers and also swiftly remove bank top managers who demonstrate that they are bad at banking, the US needs to regulate banks like utilities. They need to be kept stupid and allowed to make safe and boring profits. So no one talented will want to work for them? Outside of IT, where big banks’ systems are held together with duct tape and baling wire, banking does not require “talent” (which today usually amounts to rule-breaking or at least soft corruption), but people who perform reliably and competently. Our financial system is dangerously outsized. One way to put that in reverse is to set out to reduce pay levels across the industry.…

Not narrow banking but "plain vanilla" banking.

Banks need to be regulated like public utilities because they are public utilities of a sort, and state provision of the currency is the basis of it. In addition, banks operate on the basis of a charter granting them privileges, such as access to the central bank as lender of last resort. Moreover, it is already widely recognized that in exchange for receiving these privileges, banks acquiesce in regulation. No brainer. 

This is political problem in the US. As Sen. Dick Durbin famously said about Congress at time of the GFC, "the banks, hard to believe in a time when we're facing a banking crisis that many of the banks created, are still the most powerful lobby on Capitol Hill. And they frankly own the place." So strengthening bank regulation is easier said than done.

Naked Capitalism
How the Current Refusal to Deal Harshly with Failing Banks and Their Executives Will Create an Even Bigger Crisis
Yves Smith

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