Make them small enough to fail

Whenever there’s an economic crisis, whether it’s limited to one country or covers a region or is, like the current one, universal, some banks somewhere land in a worse situation than the others. When that happens, the cry we hear is “they’re too big to fail”, and this mantra is used to justify the government going in with millions or billions or even trillions of kronks* to rescue the banks in the danger zone, and, at the same time, to shore up the other big banks for safety’s sake. Sometimes, but not often, a fraction of the support may be paid back.

And then comes the day when the government sounds the all clear, and promises that they will do everything they can to make sure it never happens again. We’re at that stage now, with irrelevant chat about the size of bonuses, possibly a new Glass-Steagal act, not just in the US but elsewhere as well. But none of this really cuts it. It’s just cosmetic.

Why don’t they just force a break-up of these big banks that are too big to fail into smaller units that are small enough to fail. Not only would it save the tax payers a lot of money, it would increase competition in the banking sector, which is good for the consumer, and the very thought that they could be left to fail would undoubtedly change the behaviour of most bankers for the better.

Now I’m not saying that this would be an easy reform to enforce. Quite apart from the lobbying power of the financial sector, it might be hard to say what is a reasonable size for a bank. Would one go on the number of employees or the size of the balance sheet? A geographical area perhaps? But, whatever criterion is selected, the important issue would be that no one person could control more than one bank either through shares or position in the bank, and that the bank was small enough to fail.

Or here’s a thought – forbid the limitation of liability in the finance sector.

* A kronk is a unit of currency, whatever takes your fancy. When you get into these numbers, it makes no difference anyway.

© James Wilde 2015