Comments on JPMorgan's billions and the GDP

JPMorgan (and big banks in general)

Should a bank that is too big to fail be allowed to fail?

Ten years ago we wouldn't be having this conversation.  We should have been having it then, but we weren't.  My recollection is that such a question entered the popular consciousness only during the dark days of the financial crisis of 2008.

That question is actually a shorthand for a longer and more complete question; in its greater form, the question is this:  Should a bank that is too big to fail without its failure having catastrophic consequences for the overall economy be allowed to fail?

That's a good question, but I think there's a better one.

Nothing is too big to fail.  Even the biggest and strongest of the giant Sequoia trees in California's Sierra Nevada mountains will eventually be struck by lightning or some other calamity and come toppling down.
                    


These big trees have been around for centuries.  As they become really old and really big, their vulnerabilities pile up.  Eventually, something brings them down.  Others in the immediate vicinity become collateral damage and get knocked down, too, but it doesn't become a catastrophic event for the entire forest.

The comment

Confused in the Great Midwest has commented on my May 14 posting on JPMorgan's recent multi-billion dollar mistake in derivatives trading by raising the "too big to fail" question.  CITGM's comment is worth reading in full, but here's the closing point:  "Perhaps we need to challenge the notion of 'too big to fail.'  . . .  It's not yet a crime to make a bad bet. But let's also let them bear the full consequences of their decisions. The next time a mega-bank becomes insolvent as a result of poor decision-making, let's let them fail."

Those are reasonable points, and there's no denying the seductive simplicity in letting nature take its course; in making it so that people--or organizations--bear the consequences of their decisions; in recognizing the wages of sin; and then letting life continue.

Now that you've mentioned it. . .

Unfortunately, JPMorgan, and all the other big banks--all of which can fail--are big enough that any such failures would probably topple the country into a financial depression.  Collateral damage is not a pretty sight.  The failure of a big bank would create a big, ugly mess.  Lehman Brothers and Bear Stearns were not anywhere near as large as the big banks of today are, but they fell over in 2008 and we are still feeling the effects of that financial crushing.

So, yes, let's challenge the notion of "too big to fail."  I agree.

This is the question that ought to be asked:  Do we need banks that are as big as these guys have become? 

If so, then let's recognize the fact that we are allowing ourselves to be placed into a national financial environment that we have never been in before--at least, not in almost a century--and then ask this follow-on question:  What national coping mechanism is needed to enable us to exist in a secure, prosperous and democratic way when the great majority of financial power is concentrated in fewer people and organizations than at any time since the 1920s, or perhaps not since the days of the so-called Robber Barons of the late 19th and early 20th centuries?

On the flip-side, if we don't really need banks to be so big, then how do we make them smaller so that if one of them makes a bad bet and it fails, then life goes on, at least for everybody else?

The amount of financial concentration in this country is not generally appreciated.  Two days ago on May 15, Argus Market Watch reported:  "Despite the fact that there are still more than 8,000 chartered banks in the
U.S., a staggering 80% of all bank assets are held by a relative small handful of banks with greater than $10 billion of assets. Thirty years ago, that percentage was closer to 20%."  (The emphasis is mine.)

That's an earth-shaking change in the financial landscape, and the Dodd-Frank Act is the first, and only, major piece of national law-making that has been accomplished to try to update America's legal environment to address the tectonic shifts in its banking and business financial environment.

I don't know if we need mega-banks like JPMorgan, Bank of America, Citi and Wells Fargo.  But as a nation we have encouraged them to exist and to get bigger--the repeal of the Glass-Steagall Act set the foundations for today's banking system, and the banking consolidations of the last several years have built higher and higher on that foundation.  Now we have to address the consequences by either accepting the status quo and learning how to live with it--which is what the Dodd-Frank Act does--or by changing things and breaking up the big banks.

GDP and growth

Anonymous asked this question about the April 27 posting on GDP:  "Do you really need to have a GDP that is growing or could you have a flat GDP and still have a healthy economy?"

Good question, if somewhat unexpected because we focus so much of our attention on growth.

GDP should grow at least as fast as the country's population growth.  That way, the average prosperity--when measured as GDP per capita--will at least stay on an even keel.  If GDP grows at a slower rate than does the population, then there is less prosperity per person.  I would call the first scenario "healthy" and the second scenario "unhealthy."  Since the population of the United States is growing, and will continue to grow for the foreseeable future, then GDP needs to grow by at least the same rate in order for us to have a healthy economy.