The Other I

September 19, 2009

What should we do about the banks?

It was almost a year ago to the day that Lehman Brothers went bust.  It was just days after the anniversary of the 9/11 attacks, and at the time, Lehman Brothers did not feel nearly as catastrophic.

In retrospect, the danger that loomed was far worse.  There was a serious possibility that on Monday morning banks around the world would not open.  That life as we know it literally would have come to a halt.  Fundamentally, capitalism would have been replaced with barter and trust.  Credit cards and checks would be useless.  World trade would have lost the capacity to carry on.

It didn’t happen.  Things are still bad, but nowhere near as bad as they might have been.

But now that the immediate danger is diminished and the shock has been absorbed, it’s time to ask what to do about the banks.

The key question, of course, is how to reduce the chances of this happening again.  Regulators are taking about requiring banks to hold more capital so that when the system starts to crack, they have more to fall back on than they did this time.

That sounds fine to me, but it doesn’t seem to me to go far enough.  The big problem is what to do with banks that are still too big to fail and who know that they are effectively being subsidized and insured by the taxpayer.  But the taxpayer has little — no, correction:  The taxpayer has absolutely no say whatsoever about the way the banks are run.  From what I am reading, they are going back to taking the same leveraged risks and paying themselves bonuses that are simply boggling.

I’m convinced from what I’ve read that the Glass-Steagall act, passed by Congress during the depression and retracted under the Clinton administration, must be re-enacted.  Big investment banks should not be allowed to conflate their investment gambling with the deposits of savers.  So that means that we need to rebuild our small banks who know their customers and serve them responsibly, and we need to require the big banks to build a fire wall between their investment activities and the individual consumer.

From what I have read, the big banks are fighting this option tooth and nail.

Obama says that the old ways cannot, must not, will not continue.  But I wish I saw more to make that happen.  Congress seems to be enthrall to big banks, and Obama has only so much political capital, which he is using to get as much of his health care package through as possible.

It still feels like a scary time to me.

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