Too big to fail has become Too big for trial

Pinchas Landau/ by Pinchas Landau /

If you think that the fact that the Dow Jones Industrial Average this week made a new all-time record closing high proves, or even indicates, that the American economy is on the mend, then skip this, it’s really not for you. If, on the other hand, you believe, or even suspect, that the financial markets are no longer functional and therefore indicate nothing and prove only that the entire financial system is rigged, then you will not be surprised at what follows.

As an aside, the view that the markets have been rendered dysfunctional is not a fringe or weirdo view, held by nutters and propagated by political extremists — nor has it been for some time. Just this week, no less a figure than Stanley Druckenmiller – George Soros’ partner in the Quantum funds in which they both made fortunes, and no less smart, although definitely less prominent – noted that when the price of the most important financial instrument (meaning the long US Treasury bond) is being overtly manipulated (by massive Fed purchases), all the markets and the prices they generate are warped and hence meaningless.

 

The official line is that the Fed and other central banks are pursuing policies of monetary expansion on an unprecedented scale in order to prevent a financial and economic disaster on the scale of the depression in the 1930s, and to help their economies recover and begin growing ‘naturally’ again.

However, these policies have not had a uniformly beneficial effect. Indeed, their impact has been massively skewed in favour of the wealthy, because their declared aim has been to generate a ‘wealth effect’, in which people feel their financial situation to be improving and are thus encouraged to go out and spend more heavily – and to take on additional debt to finance said spending.

All this is relevant for those households that have wealth, whether real assets (primarily homes and other real estate) or financial ones (shares and bonds). But the great majority of the American population does not have wealth, nor is its income growing.

Therefore its share of the benefits of the expansionary policies has been limited or non-existent – as the rates of unemployment, under-employment, reliance on government support schemes and other measures graphically illustrate.

Indeed, there are many people who believe that the Fed’s policy is aimed primarily at propping up the banking system and, in particular, at enabling the biggest banks to regain the very high profitability that characterised them before the crash. The main beneficiaries of these profits, as is well-known, are the senior managers, followed by the staff as a whole – not the shareholders and certainly not the taxpayers. But it is the taxpayers who pick up the tab if – make that when – the banks’ reckless behavior gets them into trouble. This is primarily true of the biggest banks, whose ‘systemic importance’ makes them ‘too big to fail’, because no government can allow them to collapse and take the entire economy with them.

 

The banks know they will be bailed out and act accordingly by taking big risks with other people’s money. The concept of ‘too big to fail’ is by no means unique to the US. But the American case is remarkable because the power of the banks, channeled via their lobbyists in Washington, is so easy to identify for anyone who cares to look. They have systematically neutered the post-crash legislative proposals that would have significantly reduced their profits and power – and, better still from their point of view, they have strangled the regulatory agencies that could and should constrain them, their activities and their clout. An outstanding example of this successful defence against potential enemies was the bank lobbyists’ success in blocking the appointment of Elizabeth Warren, a Harvard law professor and outspoken critic of the financial sector’s power, as head of the new Consumer Financial Protection Board. However, Warren won election on the Democratic ticket as a senator for Massachusetts and, in this role, has resumed her activism from within Congress.

In a recent hearing to which the heads of all the main regulatory agencies were invited, Warren asked one simple question that left all of them fumbling, mumbling and stumbling, because they could not provide either a factual or a convincing answer. “When was the last time your agency took any of the large Wall Street banks to court?” The top regulators all talk about imposing fines and negotiating ‘settlements’ of various sorts – but these are just opportunities for the banks to use other people’s money to buy their way out of trouble. Warren can see through that and is willing to say publicly what many millions of Americans feel – and what many more millions in Europe and elsewhere also feel and know, hence their votes against the bank-controlled establishments in their countries, as discussed here last week. Her response: “There are district attorneys and US attorneys out there every day squeezing ordinary citizens on sometimes very thin grounds and taking them to trial in order to make an example, as they put it. I’m really concerned that ‘too big to fail’ has become ‘too big for trial’”. (The hearing is available in a Youtube clip that has gone viral — or simply go to the Huffington Post site and see their item on it.)

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About the Author

- About Pinchas Landau is an economic and financial analyst, serving as a consultant to major financial institutions in Israel and abroad on domestic and global developments. After working in banking and investment, he moved to journalism in 1983 and served as financial correspondent of the Jerusalem Post and then as senior columnist for Globes, Israel’s business daily. He has written for many international newspapers, including the Wall Street Journal and Barrons, as well as numerous professional publications. Since 1996, Pinchas has been writing and publishing The Landau Report, a unique newsletter service which analyses economic, business and financial trends in Israel, as well as tracking Israeli and regional geo-political affairs and has attracted a global subscriber base. He has also been providing quarterly and annual reports on Israel for the Economist Intelligence Unit for 25 years. Landau is also an accomplished speaker, lecturing in English and Hebrew to audiences in Israel and overseas on a range of issues relating to Israel and the Jewish world. Born in London and educated at the London School of Economics, he and his family have been living in Jerusalem since 1976.

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