'Too Big to Exist' Bill Would Impose Market Discipline 12 comments
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Senator Sanders has filed a bill called "Too Big To Fail, Too Big To Exist."
Unlike the 1900 page monstrosities, this one will take you just minutes to read. It is two whole pages.
It should become law tomorrow.
There will be those who argue that this is "anti-capitalist."
On the contrary; by refusing to force banks and other institutions to adhere to the fundamental principle of sound fractional lending - that is, insisting that for each dollar of unsecured lending outstanding at any instant in time the institution hold one dollar in actual capital we have extended the credit of the sovereign (in this case The United States) through allegedly-private institutions.
This is the sin upon which all the screaming for "bailouts" rest, for without violating this fundamental banking principle there would never be a need for a bailout, as each institution would always, at any instant in time, be able to cover every withdrawal through both asset sales at the market and excess capital held.
I therefore fully support Senator Sanders' bill and urge you to head to his petition site and sign it.
Those who argue that banks and other firms should be able to grow as large as they like cannot get past the above italicized paragraph. No firm is limited in size, but no firm should be able to leverage the government's credit for it's own private purposes, as we have seen that each and every time it is allowed these institutions use that leverage to screw the consumer and then force the taxpayer to bail out their bad lending decisions.
Senator Sanders has the right solution - one that allows firms that do not wish to be broken up to raise sufficient capital so that each dollar of unsecured lending is backed by one dollar of capital.
Such a firm, irrespective of size, would not be "too big to fail"; as such this bill would impose market discipline - not, as I'm sure detractors will argue, "socialism."
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That declaration itself would put creditors and equity holders on notice and force them to rethink about risk. After a brief period, if there was going to be any run, the government would be there to handle it, but going forward the market would enforce its own discipline. This talk of a systemic market breakdown, financial armageddon, is a laughable load of tripe if there was any. Utter manipulation by a few ultra rich bankers hell bent on using the government resources and people's ignorance to further their own ends.
Dollar for dollar for UNSECURED lending.
Loan $200,000 on a $300,000 house, you need hold no capital against it.
Want to lend $200,000 against a $100,000 house? You get to hold $100,000 in capital.
Why? Because otherwise you're lending THE SOVEREIGN'S CAPITAL!
This is THE foundation of sound banking. And, by the way, it is how banking USED TO BE done. For home mortgages it was 20% down in cash, 28% front end ratio, 36% back end. There were darn few defaults too, and those that happened left the bank whole, as it could sell off the asset.
On Nov 10 01:39 PM jamesa40 wrote:
> Dollar for dollar? Are you crazy? Might as well just declare all
> banks insolvent at that point. I'm all for the simple solution of
> imposing stricter capital requirements for banks the more assets
> they accumulate, but your (dare I say it?) "anti-capitalist" approach
> is draconian socialism at it's worst. Banks cannot just make money
> on the margin of buying deposits and selling loans. They have to
> use leverage in order to make enough to cover cost and ensure an
> adequate return to their shareholders. My requiring such a level
> of capital is to force banks out of business. But, if your intention
> is to restrict credit to all but the wealthy, be my guest.
What we got were NINJA, low-doc/no-doc, interest-only, and Liar loans (Which almost sank the system!)
On Nov 10 04:04 PM endoftheworld wrote:
> Trying to mandate how the shareholders & creditholders should
> evaluate risk is not an efficient way for assessing risk. Dollar
> for dollar or .9 for 1 or whatever way is right should be up to the
> free market to decide.
That's not the "free market", it is kleptocracy.
The reason why the "free market" failed, was because the Government, Fed and the like FAILED it. The free market calls for failure from time to time. If the Goverment keeps butting in an prevents failure, how is that "free market?"
The reason why we got no doc loans, NINJA, interest and all those other products was because everyone knew in the end, if they passed the hot potato along fast enough, there would be no consequences. And they did - to Uncle Sam, and they were and are right - there are no consequences and nor will there be, for them. For the rest of us, all these losses will be subsidised by eventually higher taxes or the printing of money, i.e. a social bane on us all. Thank your senators and congresspeople.
Simple common sense.
B of A can be broken up into 4 to 5 regional bank; etc., etc.
They did it with the phone company.
This saves us from another incompetent, expensive government regulatory bureaucracy to control too big to fail, which then becomes too incompetent to regulate.