Bernie & the Banks

Nobody is happy about the fact that the systemically important banks that survived the crisis are now bigger than ever. But at least they’re being regulated to within an inch of their lives.

Risk-taking is down substantially, so is leverage, and lots of, shall we say, non-core trading activity has been jettisoned to the hedge fund world. Market-making activity is down, with traders and associated personnel being laid off in every unit while ETFs and authorized participants pick up the slack. There is a hot debate, particularly in fixed income circles, about whether the big banks’ market-making was the only thing keeping the system liquid and healthy. We will find out who is right soon enough.

In Bernie Sanders’s world view, this de-risking at major banks is not enough. He still wants them broken up, regardless of how boring they’ve become. I’m not sure this helps anything, unless your primary aim is revenge or retribution of some kind. And that ship has sailed.

Besides, removing the now heavily-regulated banks from day to day activities creates a vacuum for other entities to step in, creating a prime environment for even more growth in the so called Shadow Banking arena. Is that what we’re looking for? Do we want increased participation on the part of asset management firms or private equity firms in the otherwise rote daily functionality of finance? To what end?

Paul Krugman elaborates on the trouble with Bernie’s TBTF obsession:

We now have a clear view of Sanders’ positions on two crucial issues, financial reform and health care. And in both cases his positioning is disturbing — not just because it’s politically unrealistic to imagine that we can get the kind of radical overhaul he’s proposing, but also because he takes his own version of cheap shots. Not at people — he really is a fundamentally decent guy — but by going for easy slogans and punting when the going gets tough.

On finance: Sanders has made restoring Glass-Steagal and breaking up the big banks the be-all and end-all of his program. That sounds good, but it’s nowhere near solving the real problems. The core of what went wrong in 2008 was the rise of shadow banking; too big to fail was at best marginal, and as Mike Konczal notes, pushing the big banks out of shadow banking, on its own, could make the problem worse by causing the risky stuff to “migrate elsewhere, often to places where there is less regulatory infrastructure.”

Josh here – the relatively tight strictures among the state-owned enterprise banks of China were meant to curtail unnecessary risks that Beijing thought would be counterproductive to the economy. It backfired and things have gone in the opposite direction. Because the state-owned banks only really lend to local government institutions and projects, the shadow banking system there has exploded. Regular people and smaller, independent businesses need credit, and they can only turn to sources outside of the banking system in many cases.

When you hear about “wealth management products” being bought by Chinese investors, this is a euphemism for retail-funded shadow lending to the real economy outside of the official financial system. China is clearly losing control, in part, as result of this unwieldy situation.


Weakened at Bernie’s (New York Times)

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