Bernie Sanders quixotic charge at the Federal Reserve Bank is as pointless as Rand Paul’s demand for an audit of its books. The bank is so far from the reality of everyday life that its followers are just reading tea leaves. Bernie showed some understanding of the Wall Street problem when he described in the first Democratic primary debate the phenomenon of regulatees regulating the regulators. Its called Regulatory Capture defined by Nobel laureate economist George Stigler, “Regulatory capture is a form of political corruption that occurs when a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating. Regulatory capture is a form of government failure; it creates an opening for firms or political groups to behave in ways injurious to the public (e.g., producing negative externalities). The agencies are called captured agencies.” Yet he still believes regulating the captured finance industry is still possible!
Though they approach it from diametrically opposed ideological views Sanders and Paul agree that TBTF (Too Big To Fail) banks need to be converted to NTBTF (Not Too Big To Fail) as soon as possible. A very simple suggested law written in the manner of our forefathers with general markers and no attempt to micromanage would be that financial institutions; be they bank, insurance or fund, control no more than one percent of GDP (Gross Domestic Product) in assets. Those in charge of assets greater than that would be required to split into a sufficient number of separate companies with each at or below the legal limit. Companies that grow from below 1% to over 1.5% would be required to split in two bring both halves to a level below 1%. The splits can be inexpensively done for its stockholders by distributing shares of all the different new entities to the shareholders of the original big company, very much in the same manner that the Bell Telephone company was split off into the various “Baby Bells”.
If the law is kept simple with no exceptions worked in by the powerful Wall Street lobby in Washington then in one fell swoop the concentration in banking is reduced to a level that prudence, fear of failure, is ingrained in the system. The NTBTF value in a $18 trillion dollar economy would be $180 billion which would give approximately ten J P Morgan Chase banks units for distribution to its stockholders. Think of it as the banker’s employment opportunity act which would require ten Jamie Dimons et cetera, et cetera but less dependence on the profit from risky derivative instruments built on hair trigger slivers of leveraged assets. Instead of a government guarantee banks would have to rely on counterparties with strong balance sheets and honest dealing and no more dependence on a credit agency’s rating coerced with a wink wink as pictured in “The Big Short”, Hollywood’s latest and very good explanation of what hit us in the Great Recession of 2008.
Reduced concentration in banking would do much to alleviate the other political bugaboo, income inequality. With fewer assets under each bank’s control the less the incentive for brainless control of assets so that fewer assets sustain stagnant accounts and more effort is put into productive Investments. Banker’s income would be more of a reflection good management rather than the automatic doling out of a sliver from a giant asset base under management. Also with many small banks, the lobby in Washington would have a much harder time to practice regulatory capture. Politically this proposed simple bank law would be opposed by the establishment, that would be Republican elites and Hillary Clinton. it’s a worthy charge for both Sanders and Paul.
