JasonC

Even Alan Greenspan Thinks the Banks Have Become Too Large

Um, the idea that banks can be allowed to fail if only they are small enough is a delusion.

We can let banks under $100 billion in assets fail these days because they are a tiny portion of the entire financial sector. But if you slice Citi and B of A and the rest into $100 billion pieces, can you let each of them fail when credit weakens?

You cannot. They own the same stuff, and 25 $100 billion banks going down the same week is no more livable than one $2.5 trillion bank going down. You have to stop them from failing if the event gets large enough, full stop.

Authorities save little ones by selling them to bigger ones and then only worry about keeping the big ones afloat, and the true small fry can just be liquidated. Check. Then the "burn it all down" liquidationists imagine they'd get their way if only all the banks were small enough. Um, no, not remotely.

The whole reason $2.5 trillion banks can't be allowed to fail is the real economy can't take the money supply collapsing like that. But exactly the same money supply collapse is threatened by multiple failures of medium sized banks. The saving effort is just more complicated, that is all.

Everyone deludes themselves that the authorities can get out of paying by just refusing to save failing banks. That too is a delusion. Widespread bank failure sticks the whole bill for the mess on the authorities' desk, it does not avoid a dime of it. In fact, the longer you wait and the more reluctantly you pay up, the more you get to pay because the lower confidence has gone and the higher risk premiums have soared.

You cannot make capital cheaper by refusing to pay for it. Grok already. Capital is paid for, in full, or is evaporates. In a world in which vast quantities of capital value are allowed to evaporate, you pay more not less for capital because it is scarcer and riskier.