Danger Ahead: Public Utility Model for Banks

Does "Too Big To Fail" equate to "Public Utility"?

From WIki:

A public utility (usually just utility) is an organization that maintains the infrastructure for a public service (often also providing a service using that infrastructure). Public utilities are subject to forms of public control and regulation ranging from local community-based groups to state-wide government monopolies. Common arguments in favor of regulation include the desire to control market power, facilitate competition, promote investment or system expansion, or stabilize markets. In general, though, regulation occurs when the government believes that the operator, left to his own devices, would behave in a way that is contrary to the government’s objectives. In some countries an early solution to this perceived problem was government provision of the utility service. However, this approach raised its own problems. Some governments used the state-provided utility services to pursue political agendas, as a source of cash flow for funding other government activities, or as a means of obtaining hard currency. These and other consequences of state provision of utility services often resulted in inefficiency and poor service quality. As a result, governments began to seek other solutions, namely regulation and providing services on a commercial basis, often through private participation.

The term utilities can also refer to the set of services provided by these organizations consumed by the public: electricity, natural gas, water and sewage. Telephone services may also be included.

Granted, Wiki is not the final authority. However, the definition poses interesting questions. Is banking a public service? Rather, is a stable banking system a prerequisite for a healthy economy?

These arguments are being made right now by advocates of massive ongoing taxpayer bailouts for Wall Street IBs (excuse me, BHCs). The same arguments can be made, just as forcefully, regarding electrical power, telecommunications, water and sewer services. Do threats to the electrical grid pose "systemic risk"? You're damned right they do.

In exchange for their public utility status, and accepting significant government intervention into their business practices, and also assuming respectable business performance, most electric companies are effectively guaranteed a respectable but sane rate of return. Banks, by demanding to be bailed out using public money, are touting their status as "essential utilities" and are in effect demanding to become public utilities.

Now that they're being treated as utilities, their salaries and business practices are being called into question. Their response? "Thanks for the bailout money, but we are private companies with employment contracts to honor. Now that the taxpayers have saved us, we don't want to be utilities anymore. Can't we have our cake, and eat it, too?"

I am not advocating the utility model. For my part, I favor no bailouts, no salary caps, no interventions, no credit bubble blowing. But the act of "saving" banks using money stolen from taxpayers, only to release the banks once again after they have recovered, is the surest illustration of moral hazard and a virtual guarantee of a repeat performance. How to prevent the repeat performance?

Wall Street anksters: Be careful what you wish for.