How to cut megabanks down to size • Hacker News Board

Re: How to cut megabanks down to size

#31

Post by dantheman » Sun, Jan 20, 2013, 9:07 PM UTC

aaronblohowiak wrote: post #22

ataggart wrote: post #19

Earlier quoted context omitted.

Per the article, size is correlated with problems but not the cause of them. It happens that large banks are the ones who are more likely to get bailed out, thus they are incentivized to take more risk, so they do. It is the potential for government bailouts/protections that is the root of the issue, thus the proposal is basically to stop doing that.

The problem is not the bailout, per se, the problem is that the bailout didn't wipe-out shareholder value (and executive compensation) in the process.

the problem is the bailout, just don't bail them out.

Re: How to cut megabanks down to size

#32

Post by ttar » Sun, Jan 20, 2013, 9:10 PM UTC

natrius wrote: post #27

ttar wrote: post #9

Earlier quoted context omitted.

FDIC is a form of privatizing the profit, while socializing the risks for the banks.

The FDIC is funded by banks. The FDIC did not have to use taxpayer dollars during the financial crisis. In practice, the FDIC has not been involved in these socialized risks you speak of, though if it ran out of money, the government would back it up. The FDIC also provides public benefits, like avoiding economy-crippling bank runs. It's a good thing.

The FDIC is bailed out by the taxpayer, so does the private banks. It's a nothing but socializing the risks, while privatizing the profits. It's immoral.

China does things right here, when it fails due to your corruption, you get executed, instead of bailed out.

Re: How to cut megabanks down to size

#33

Post by svachalek » Sun, Jan 20, 2013, 9:16 PM UTC

ataggart wrote: post #25

josephlord wrote: post #14

Earlier quoted context omitted.

Smaller banks survived this crisis with relatively few failures but that has not always been the case (e.g. Savings and Loans crisis). However the fact that they can fail is critical and a sufficient reason to break them up even if it won't make them better. Banks that are too big to fail are too big to be allowed to exist. Government protection only for the commercial/retail part is an obvious but insufficient requi…

It's not clear to me how "bigness" matters. The article makes clear that small banks were exposed to disciplining market forces, but for large banks such forces were obviated by government protection. Worrying about size seems to miss the point.

"Obviated by government protection" BECAUSE of their size. Thus the slogan "too BIG to fail".

When big banks make money by taking crazy risks, they earned every penny and how DARE we try to tax or regulate them. When they lose money by taking risks, we need to bail them out for the good of the free world and how DARE we ask to be paid back. Small banks do not have this attitude.

Re: How to cut megabanks down to size

#34

Post by svachalek » Sun, Jan 20, 2013, 9:18 PM UTC

rwmj wrote: post #13

I'm confused by this. The large banks are (arguably) more efficient because of economies of scale, eg. less duplicated management, purchasing power. So it's probably not a good idea to limit the size of banks which is what this article seems to propose, because that'll make banking more expensive. But the flip side is: why don't we just let megabanks go bust? If they go bust, the government steps in, briefly national…

Your first argument rests on the idea that they will pass those economies of scale on to consumers, which I have never found to be the case. In my experience, smaller banks are consistently more competitive; they pay higher rates, charge lower rates, and have fewer fees.

Re: How to cut megabanks down to size

#35

Post by natrius » Sun, Jan 20, 2013, 9:20 PM UTC

ttar wrote: post #32

natrius wrote: post #27

Earlier quoted context omitted.

The FDIC is funded by banks. The FDIC did not have to use taxpayer dollars during the financial crisis. In practice, the FDIC has not been involved in these socialized risks you speak of, though if it ran out of money, the government would back it up. The FDIC also provides public benefits, like avoiding economy-crippling bank runs. It's a good thing.

The FDIC is bailed out by the taxpayer, so does the private banks. It's a nothing but socializing the risks, while privatizing the profits. It's immoral. China does things right here, when it fails due to your corruption, you get executed, instead of bailed out.

The FDIC has never been bailed out, and as I pointed out, there are plenty of public benefits to that government guarantee. We would be less wealthy as a society without it.

Re: How to cut megabanks down to size

#36

Post by MichaelApproved » Sun, Jan 20, 2013, 9:24 PM UTC

ataggart wrote: post #6

>small institutions must submit to the rigors of the free market. >market discipline has worked to keep smaller institutions on the straight and narrow, it has been ineffective with megabanks >market participants have proved [in]effective in monitoring risks at these [huge banks]. >They know they will be protected by a taxpayer rescue should a large institution teeter. How is this not obvious to everyone involved?

"They know they will be protected by a taxpayer rescue should a large institution teeter."

This should be mitigated by the fact that shareholders will lose value, even in the event of a taxpayer rescue. Meaning, a bailout isn't a good insurance policy for a shareholder because they lose anyway. But that fear of a bailout doesn't seem to limit the risk appetite as I'd expect.

I think it's because regulation and control hasn't made this type of risk transparent to the shareholder. The shareholder isn't calling for these types of regulations because of fear the regulation would be overbearing and hurt profitability.

Often, over regulation is a shortsighted concern that allows a company to take on more risk than an investor would typically allow for (at existing valuations).

Re: How to cut megabanks down to size

#37

Post by noibl » Sun, Jan 20, 2013, 9:46 PM UTC

druswick wrote: post #24

Another interesting way to think about "too big to fail" is as a considerable government subsidy. Banks operate in a risky environment. When there's a meltdown, the government steps in to bail the largest banks out. These banks are getting a free insurance policy from the government, a subsidy that's not going to the smaller banks.

The word 'meltdown' is apt.

[Price–Anderson Nuclear Industries Indemnity Act] http://en.wikipedia.org/wiki/Price%E2%80%93Anderson_Nuclear_...

Re: How to cut megabanks down to size

#38

Post by WayneDB » Sun, Jan 20, 2013, 9:53 PM UTC

ttar wrote: post #12

sc68cal wrote: post #11

Earlier quoted context omitted.

We tried that. Our country has had great difficulty with central banking in the past, and today. Entire books have been written on this topic, if you wish to learn more, I'd start with the history of the First and Second bank of the United States. https://en.wikipedia.org/wiki/First_Bank_of_the_United_State... https://en.wikipedia.org/wiki/Second_Bank_of_the_United_Stat...

The East Asian economic miracle is all about the state in control of the banks (printing). Read Quest for Prosperity -- the private/public construct of distinction is a complete myth that is exposed by the titans in Asia and Latin America. The more we stick to the myth in the US, the longer it will take for us to have the same degree of success. Innovation comes not out of motive for profit, but ou of need and desire…

I agree that a sovereign nation shouldn't be borrowing from anybody in order to trade with other nations, but isn't the Asian economic miracle also driven by slave labor?

Re: How to cut megabanks down to size

#39

Post by rumcajz » Sun, Jan 20, 2013, 9:53 PM UTC

The proposal should be extended to all "too big" companies.

Big companies combine the worst characteristics of state-owned and privately-owned enterprises.

On one hand, large amount of small shareholders makes them similar to state owned companies (in which everyone is a shareholder) with all the associated bureaucracy, parasitic management class, pathological incentives etc.

On the other hand, being private they lack even the weak control mechanisms that democratic societies impose on state-owned companies.

Re: How to cut megabanks down to size

#40

Post by jwallaceparker » Sun, Jan 20, 2013, 10:03 PM UTC

rumcajz wrote: post #39

The proposal should be extended to all "too big" companies. Big companies combine the worst characteristics of state-owned and privately-owned enterprises. On one hand, large amount of small shareholders makes them similar to state owned companies (in which everyone is a shareholder) with all the associated bureaucracy, parasitic management class, pathological incentives etc. On the other hand, being private they lac…

> The proposal should be extended to all "too big" companies.

So break up Apple? Break up Amazon? Break up Paramount?

> On the other hand, being private they lack even the weak control mechanisms that democratic societies impose on state-owned companies.

They have the control mechanism of the marketplace.

Doesn't this work beautifully for the big companies like Amazon and Apple?

Provide a good product/service or fail.