Date: 12 Aug 14
By: Frank Gue, B.Sc., MBA, P.Eng.,
2252 Joyce St.,
Burlington, ON L7R 2B5
905 634 9538
To: Mr. Howard Elliott, Chair of the Ed. Board,
The Spectator, Hamilton
Re: “Big banks get downgraded” and “Big banks get
warning shot on stability”, Aug. 12 Spec.
This is a logical follow-up to mine of Jan. 26, 2008 in which I forecast (accurately) the big meltdown and gave the reasons for it. That article got me a lot of good feedback; I don’t know about yours. Hope you can use it. It is, as usual, an effort to put into lay language some of the jargon we hear constantly, and adds a suggestion of what the reader personally might contribute.
Suggested headline: What “That bank is too big to fail” means to us
Suggested key-word block: You and I paid for 2008 and will pay for the next one too.
What “That bank is too big to fail” means to us
Year after year the battle continues. There are three main contenders:
Banks wish to maximize the big profits from using borrowed rather than their own money to invest in their (often risky) choices of assets; example, the dubious mortgages that caused the 2008 meltdown. They want ever-smaller reserve capital of their own money, or “their own skin in the game”.
Regulators and rating agencies like S&P are criticized for laxity as these reserves became so tiny (less than 1% of assets in some US 2008 cases), and press banks to raise them.
The third member of this triangle is bank self-regulators like the Basel group; these try to pretend they can serve both interests, the public’s and the banks’, using semantics such as curious definitions of “risk” to confuse us.
Circling happily above the chaos are the financial vultures like Goldman Sachs (G&S), waiting to swoop down upon the carrion left by failed banks, indebted governments, and hapless defrauded investors. They use clever devices like G&S’s can’t-lose double-bet on mortgage securities they knew to be far sub-prime: “unethical but not illegal”, said the Securities and Exchange Commission.
The Washington Post is quoted as again bringing up the “too big to fail” argument that implies that governments will always
back up big banks that fail, using taxpayer money to do it. This directly puts “your skin in the game”, my fellow citizen. You know, I am sure, that you and I, by devious routes, paid and are paying still for the latest crash, in 2008, and will pay for the next one too under the “too big to fail” mantra. We do hope you still have a job.
But natural justice screams for a better rule, one that protects taxpayers from this kind of theft. Try this: “If a bank is too big to fail, it must buy an insurance policy too big to ignore”. This could well require, for instance, that a given bank carry a reserve of its own money proportional to its share of the assets of all the banks in its group, plus a “safety reserve”. They could thus together, internally, “bail out” a bank that failed using their own, not tax, money (called a “bail in” in the jargon).
Can’t you hear the screams of anguish from the financial community? Among the loudest would be that the relatively huge capital reserves required would result in illiquidity (the unavailability of capital to invest in productive enterprises). That, however, is a specious argument; 2008 resulted anyway in the loss of liquidity from which we are still suffering. Insurance policies do, indeed, cost money; and the greater the risk the more they cost. The risk of another 2008-style meltdown under today’s banking rules is simply enormous; therefore the cost of the insurance to protect citizens against a bank-failure raid on their domestic finances is correspondingly large. In fact, murmurings in some corners of the financial community are suggesting reserves as large as 30%, contrasting starkly with the less-than-1% often seen in 2008. The banks will probably succeed in fighting this off; but they (and we) should note which way those winds are blowing.
Our government should discard the fiction that matters such as the setting of interest rates and reserve ratios is done at arm’s length by others: instead they should lean heavily on the banks to install safeguards against the “too big to fail” disasters that impoverish us, the undeserving citizenry.
Do you know who your federal MP is?
– 30 –