Juicing the banks

Matt Yglesias, in reflecting on the Capital Paradox, specifically the resulting bank bailouts, compares to how a smaller regional bank he actually was a patron of was prosecuted for among other things money laundering for dictators & apparently sees a Catch 22. Or at least, I hope he does if I’m reading this right:

A midsized regional bank facing prosecution and being taken over by a larger regional bank from a geographically adjacent region is bank regulation as it’s supposed to be done. But what if the DOJ had prosecuted Bank of America or Citigroup into nonviability in 2009? Who was going to buy them? Nobody! That was the whole point of TARP and all the rest. Had you secured criminal convictions against these megabanks, you’d have had to nationalize them and assume their liabilities or else face an economic catastrophe.

First quibble is an obvious one: if merging a troubled bank into another one is How Bank Regulation Is Done, then the format of said regulation effectively encourages size. This is a formulation not far off the “Huh?” factor from how constantly threatening a foreign country is supposed to somehow discourage them from seeking nuclear weapons.

Matt from here draws a distinction between the bailouts and state seizure of the large finance players involved in the crackup. On its face though, that BofA would’ve been nonviable if prosecuted yet money was funneled to them anyway suggests that it was nonviable anyway. Further, any high finance institution still benefiting from unearned funds from the government, whether taxed or written into existence, is effectively the walking dead. Combine this with the revolving door relationships between “regulator” and the regulated, and an alternate reason for avoiding state seizure emerges: each party already owns as much of each other as they want. The government seizing Bank of America would be like announcing the seizure of your own arm.

“Too big to jail”? There is just Too Big, and the steroid dealers run the league. Play ball!

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About b-psycho

Left-libertarian blogger & occasional musician.
This entry was posted in economics, law. Bookmark the permalink.

One Response to Juicing the banks

  1. Right you are.

    Reorganization under supervision of trustees appointed by a Bankruptcy Court is not the same this as nationalization, although a lot of people have an interest in blurring the distinction. This was how things were handled during the savings and loan crisis.

    If I had been in charge in 2008, I’m not sure I would have had the nerve to let the crisis take its course. But I would have made damn sure afterwards to break up the banks and make them accountable, and public opinion polls show this is what the American people want as well—Republicans even more than Democrats.

    I think Thomas Ferguson, the author of The Investment Theory of Political Parties, has it right. We voters pick the winners, but powerful corporate interests pick the players.

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