The Economy Cannot Recover Until the Big Banks Are Broken Up

George Washington's picture

Washington’s Blog

A lot of people still haven't heard that the economy cannot recover until the big banks are broken up.

In fact, virtually all independent economists and financial experts are calling for the big banks to be broken up, including:

  • Dean
    and professor of finance and economics at Columbia Business School,
    and chairman of the Council of Economic Advisers under President George
    W. Bush, R. Glenn Hubbard
  • The leading monetary economist and co-author with Milton Friedman of the leading treatise on the Great Depression, Anna Schwartz
  • Economics professor and senior regulator during the S & L crisis, William K. Black
  • Professor of entrepreneurship and finance at the Chicago Booth School of Business, Luigi Zingales

Why do these experts say the giant banks need to be broken up?

Well, small banks have been lending much more than the big boys. The giant banks which received taxpayer bailouts have been harming the economy by slashing lending, giving higher bonuses, and operating at higher costs than banks which didn't get bailed out.

As Fortune pointed out, the only reason that smaller banks haven't been able to expand and thrive is that the too-big-to-fails have decreased competition:

for the nation's smaller banks represents a reversal of trends from
the last twenty years, when the biggest banks got much bigger and many
of the smallest players were gobbled up or driven under...

big banks struggle to find a way forward and rising loan losses
threaten to punish poorly run banks of all sizes, smaller but well
capitalized institutions have a long-awaited chance to expand.

So the very size of the giants squashes competition, and prevents the small and medium size banks to start lending to Main Street again.

And as I noted in December 2008, the big banks are the major reason why sovereign debt has become a crisis:

Bank for International Settlements (BIS) is often called the "central
banks' central bank", as it coordinates transactions between central


BIS points out in a new report
that the bank rescue packages have transferred significant risks onto
government balance sheets, which is reflected in the corresponding
widening of sovereign credit default swaps:

scope and magnitude of the bank rescue packages also meant that
significant risks had been transferred onto government balance sheets.
This was particularly apparent in the market for CDS referencing
sovereigns involved either in large individual bank rescues or in
broad-based support packages for the financial sector, including the
United States. While such CDS were thinly traded prior to the announced
rescue packages, spreads widened suddenly on increased demand for
credit protection, while corresponding financial sector spreads

In other words, by assuming huge portions of
the risk from banks trading in toxic derivatives, and by spending
trillions that they don't have, central banks have put their countries
at risk from default.

Now, Greece, Portugal, Spain and many
other European countries - as well as the U.S. and Japan - are facing
serious debt crises. We are no longer wealthy enough to keep bailing out
the bloated banks. See this, this, this, this, this and this.

Indeed, the top independent experts say that the biggest banks are insolvent (see this, for example), as they have been many times before. By failing to break up the giant banks, the government will keep taking emergency measures (see this and this) to try to cover up their insolvency. But those measures drain the life blood out of the real economy.

And by failing to break them up, the government is guaranteeing that they will take crazily risky bets again and again, and the government will wrack up more and more debt bailing them out in the future. (Anyone
who thinks that Congress will use the current financial regulation -
Dodd-Frank - to break up banks in the middle of an even bigger crisis is
dreaming. If the giant banks aren't broken up now - when they are threatening to take down the world economy - they won't be broken up next time they become insolvent either. And see this. In other words, there is no better time than today to break them up).

Moreover, Richard Alford - former New York Fed economist, trading floor economist and strategist - recently showed that banks that get too big benefit from "information asymmetry" which disrupts the free market.

Indeed, Nobel prize-winning economist Joseph Stiglitz noted in September that giants like Goldman are using their size to manipulate the market:

main problem that Goldman raises is a question of size: 'too big to
fail.' In some markets, they have a significant fraction of trades. Why
is that important? They trade both on their proprietary desk and on
behalf of customers. When you do that and you have a significant
fraction of all trades, you have a lot of information."

he says, "That raises the potential of conflicts of interest, problems
of front-running, using that inside information for your proprietary
desk. And that's why the Volcker report came out and said that we need
to restrict the kinds of activity that these large institutions have. If
you're going to trade on behalf of others, if you're going to be a
commercial bank, you can't engage in certain kinds of risk-taking

The giants (especially Goldman Sachs) have also used high-frequency program trading which not only distorts the markets
- making up more than 70% of stock trades - but which also lets the
program trading giants take a sneak peak at what the real (that is,
human) traders are buying and selling, and then trade on the insider
information. See this, this, this, this and this. (This is frontrunning,
which is illegal; but it is a lot bigger than garden variety
frontrunning, because the program traders are not only trading based on
inside knowledge of what their own clients are doing, they are also trading based on knowledge of what all other traders are doing).

Goldman also admitted
that its proprietary trading program can "manipulate the markets in
unfair ways". The giant banks have also allegedly used their Counterparty Risk Management Policy Group (CRMPG) to exchange secret information and formulate coordinated mutually beneficial actions, all with the government's blessings.

Again, size matters. If a bunch of small banks did this, manipulation
by numerous small players would tend to cancel each other out. But
with a handful of giants doing it, it can manipulate the entire economy
in ways which are not good for the American citizen.

Moreover, JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley together hold 80% of the country's derivatives risk, and 96% of the exposure to credit derivatives. Experts say that derivatives will never be reined in until the mega-banks are broken up, and yet unregulated derivatives are one of the main risks to the economy.

In addition, as everyone from Paul Krugman to Simon Johnson has noted, the banks are so big and politically powerful that they have bought the politicians and captured the regulators. So their very size is preventing the changes needed to fix the economy.

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collinar's picture

It has been said before, but worth repeating here: if government fines for big bank crimes are a tiny fraction of the profits from those crimes; then the fine is not a punishment; it is sharing in the profits of the crime. Our own governmet is as much a part of these crimes as the banks. Our Constitution is very clear about what We the People are obligated to do in this situation.

Quixotic_Not's picture

Our Constitution is very clear about what We the People are obligated to do in this situation.

I'm sorry, can you refresh my memory on what part of the USCON you're talking about?

I thought the USCON dealt with the intended framework of the .GOV established following the revolt.

P.S.  FYI the USCON has been suspended since March 1933...

In this 1973 official report, the U.S. Senate admits that the Emergency Powers given to the President under the pretense of the National Emergency of 1933 have remained in force and that the normal function of the Federal government has been suspended.

93d Congress
Report No. 93-549
1st Session

Since March 9, 1933, the United States has been in a state of declared national emergency. In fact, there are now in effect four presidentially-proclaimed states of national emergency: In addition to the national emergency declared by President Roosevelt in 1933, there are also the national emergency proclaimed by President Truman on December 16, 1950, during the Korean conflict, and the states of national emergency declared by President Nixon on March 23, 1970, and August 15, 1971.
These proclamations give force to 470 provisions of Federal law. These hundreds of statutes delegate to the President extraordinary powers, ordinarily exercised by the Congress, which affect the lives of American citizens in a host of all-encompassing manners. This vast range of powers, taken together, confer enough authority to rule the country without reference to normal Constitutional processes.

Under the powers delegated by these statutes, the President may:
Seize property; organize and control the means of production; seize commodities; assign military forces abroad; institute martial law; seize and control all transportation and communication; regulate the operation of private enterprise; restrict travel; and, in a plethora of particular ways, control the lives of all American citizens.


Welcome to the desert of the real...

Expat's picture

If we break up the big banks, then the terrorists will have won!

Seer's picture

And to make sure that <strike>Defense Contractors</strike> Freedom survives it will be necessary for us to turn over any "wealth" that we may still be clinging to.  This is, after all, national security that we're talking about!  So, are you with us, or are you with the terrorists?

mt paul's picture

just destroy the dollar 


avoid all that book keeping ...

long red ink..

pigs need to eat's picture

Which of these fine institutions holds deposits for the CIA etc?  What will all the spooks do when they have to cancel their Xmas club accounts and move the money through the main street bank managed by Bubba and Flo.  Nothing to see here, everyone at the bank bought new bass boats with their bonus this year. 

Seer's picture

Look into the origins of AIG.  I'm pretty certain that AIG wasn't going to be allowed to fail for this very reason.

Windemup's picture

3 Trillion bucks worth of dynomite should do the trick.

Trifecta Man's picture

Off topic -GW previously presented many articles related to the Gulf oil spill by BP.  In several videos on page 2 of the following link, you can see the latest episode of Conspircay Theory with Jesse Ventura.  It has major implications on the supply of food and the effect of an alteration in the Gulf warm water stream that appears to be impacting the weather in Europe now.  (Let alone their benefactors now in government positions here.)

YHC-FTSE's picture

It's funny (sort of) how these topics are revisited. I am sure we all had fierce debates about the bailout of the banks since the idea was first introduced shortly after Lehman's collapse. As I explained then, Lehmans was allowed to collapse because they hadn't been irresponsible enough to warrant a rescue. If Fuld had gone all in with JPM, GS, AIG, etc to fuck up everyone else's companies, and therefore made Lehman's impossible to bankrupt without bankrupting everyone else, he would have been saved. 


Of course they should have all been allowed to die or be sold off - newer and more vigorous banks who hadn't been so irresponsible would have taken their places in a heartbeat - That's capitalism. But then as now far too many key people are GS alumni and they band together like the marines in Fallujah. They don't give a shit who they kill, as long as they survive. I don't know what the fuck kind of system this is - future generations will have to invent a new word to describe it. As for resetting, I reckon it's just far too late to turn it all back now, we're too far into Alice in Wonderland territory to avoid a collision course with destiny. 


I have tried very hard to make sense of the markets (Which just involves watching what the Fed and GS does these days), believe me. I don't think I am stupid, I am certainly qualified enough, but I reached my limit of convoluted theories a long time ago. 

SofaPapa's picture

" I don't know what the fuck kind of system this is - future generations will have to invent a new word to describe it."


No new word required.  Crony Capitalism has occurred many times and in many places before.  The only thing different this time is the scale, and therefore the consequences.  There is no "outside group" to come in and reconfigure this particular iteration of the phenomenon.  That's where it gets interesting.

YHC-FTSE's picture

I was thinking of something more elegant than Crony Capitalism, but that is quite succinct, thanks. I know there are those who like to go all the way to 14th century Italy to make this point, but I usually shy away from such shocking revelations that deflate all hope for ordinary people like me. If indeed there is no more competition (Are we not the competition?) to those who already hold the reins, that sounds far more ominous than I could have imagined. At the risk of sounding like sheep, whatever happened to noblesse oblige? Decency, compassion, justice, and reputation? Never mind.

ThreeTrees's picture

What's all this bullshit about "breaking up" these megalithic banks?  They don't NEED to be broken up.  Take away the ZIRP gravy train, QE and the federal backstops and these institutions liquidate on their own.

Why do we need an army of overpaid bureaucrats to do a Job the market would already have accomplished fully, and completely if it weren't for statist meddling?

Bring the Gold's picture

That's a very good point ThreeTrees. Remove proboscis and they starve and liquidate.

Thanatos's picture

How does a Junkie kick?

First they have to want to... Without that they never kick the junk.

Do you see any indication that the People who actually hold power think that they have a problem?

Yes, these folks listed know we have a problem, but they are not in a position to change anything, just bitch about it.

Ok.. What is the "problem" they think they have?

Is it that they are all corrupt or un-ethical? Hell No.

You are their problem. Whiney, Bitchy little people who want shit like "justice" and "transparency" and "freedom".

You are "ruining" it for everyone...

Does that sound like the thinking of a Junkie who is getting ready to Kick?

Or does it sound like a Junkie who is blaming everyone else for their junk habit?

I submit that they will never give up the junk. We can only try to reduce their dependance by withholding funds and expertise in any way possible.

Seer's picture

Yup!  Like power would concede itself!

Again, for those who have not had read it:

POOF!  They go away!  No need to resort to any "rights" granted by the 2nd Amendment!

Kali's picture

Thanatos- "We can only try to reduce their dependance by withholding funds and expertise".    Reminds me of the old term "Refuseniks".  Anybody here old and moldy enough to remember that?  I declare myself a "Refusenik" in a more modern sense of the term. : )

(Please, for those of you who know the origin of the term, don't turn this into a israeli/jewish thing.  I am thinking in the more global sense of refusing to let people out of the system who want to leave it)

Thanatos's picture

Yeah... I have heard of it... But you know how mental associative processes can really screw things up for a fella...

I am picturing guys with pointy beards and little satellites with long antennae... Hahahaha... How funny.

I am already a certified "Refusenik" (among other things) according to the woman sitting in the next room!

But yes. Starve the beast is kinda played out, yet accurate. We have too be willing to put away (PMs, FX, Etc) any wealth we collectively possess and "get poor" or leave the US. If that is done en masse there will be some real consequences.

That will never be allowed to occur and thus "calling out" the true motives of the system that we are rejecting. The rest is complex and somewhat frightening to the enlightened. In short, A very tricky balancing act will need to occur if the US is to maintain any form of sovereignty. The sharks are circling our sinking boat, if our internal fighting breaks our ability to defend ourselves from these circling sharks, we will be in a great deal trouble.

These are truley very perilous times, much more so than the early and mid 80's at the peak of the Cold War... Ask anyone involved professionally, they will tell you... They long for the good ol days of the Cold War... Nice and contained, Dogmatic Doctrine worked well, It was a simple equation. Now it's fucking quantum attachement theory equations that go on for days and even the best pros get all turned inside out trying to "work it through". There are no longer men (warmonger, pacifist or otherwise) that can completely contain the analysis of all the factors. They are modeling shit on computers using god knows what kind of models (raum, adapted weather, who knows?) to "assist" in the analysis that leads to hard decisions..

The more you know... The more you drink...

Bring the Gold's picture

Brilliant post. I had to lol at the end.

LawsofPhysics's picture

The banks do indeed own the government.  When you begin to see a move to eliminate or modify the second amendment, then you can sweat.  Until then, just hedge accordingly.

apberusdisvet's picture

The government doesn't need to overturn the 2nd Amendment; all it has to do is prevent ammo sales by shutting down factories, confiscating inventories and restricting imports.

Thanatos's picture

When you begin to see a move to eliminate or modify the second amendment, then you can sweat...

Because it will mean instant Civil War.

Seer's picture

Yawn... How about you go first?  Nope, didn't think so...  I get tired of this threat of violence.  Reality says that very FEW people actually have the balls to reach this level.  And, reality also says that violence never seems to work: yeah, it roughs stuff up, but it generally just places another set of crooks at the controls.

The Navigator's picture

When Hell freezes over.

The banks own the government - who then will force the breakup of the big banks?

But I completely agree that it needs to be done.

Seer's picture

No force required!  We need only turn our backs on all of it.

It's like the Wizard of Oz (which there's been speculation that it was based on this very thing), we no longer should cower before them.

Decentralization.  Localize.  Diversify.

Ferg .'s picture

I think one of the more positive outcomes from the collapse and nationalization of the banking sector here in Ireland is that individual banks will be restructred and downsized . Their involvement in obscenely risky loans is over . Now and forever . When this debacle is finally brought to a close they will be a shell of their former selves , reduced solely to lending prudently to Irish residents and businesses .


Seer's picture

I'd hardly feel good about this given that it's basically the IMF that's making the call on this (argue that it's the Eurozone, but this world is run/controled by the US empire, it controls the IMF).

Things ain't what they fucking appear to be.

Ireland lost its chance to toss of the shackles.  A full-blown revolt/revolution was the ONLY way out.  Welcome back to hell... back to the grind stone, and make sure you pay your tithings to the banksters!

Sudden Debt's picture

pretty naive thinking.

They will never be broken up. They are the ship.

Without these banks = no economy as we know it.

This globalized world needs global banks. If you like it or not.


benb's picture

Yes naïve…And I’d agree that the chances of breaking them up are pretty low. But they are not the ship. Predators- yes. Parasites- yes. Subversives and enemies of what used to be the somewhat free peoples of this orb- yes. “A globalized world needs global banks.” -Yes… It’s just that we don’t need a ‘Globalized’ world. This ‘Global’ crap all just an elaborate scam by the ruling families i.e. The Syndicate to rob all of us blind and relegate us to serfdom.

Bring the Gold's picture

+1,000,000,000,000,000 just to cover the notional derivatives and that could be 400 billion shy.

Dead on benb.

GottaBKiddn's picture

When the wave of immoral "no trust/no civility" hits the masses there will be a tsunami of individual distrust and uncivility beyond the imaginations of those who seek to "fix everything" by closing a few banks.

f16hoser's picture

All we can do is stop investing in the stock market. Let the FED keep doing it (POMO/PPT) so as to crush the dollar into obliveon. Buy Physical Gold/Silver until such a time when it takes over as real currency. They've already started too so you best hurry-up and get on board!

Silversinner's picture

Do not believe gouverment will fix this

my guess is the market will take care

of business in a brutal way,got PM's ?

Seer's picture

The banks OWN the market!  Wasn't it already obvious that they were willing to take eerything down unless they got Their way?  I doubt that it's a bluff.  If they can't be in power then there will be no power: this would be fine for me, but too many people believe that they have to have someone else directing their lives (be it from mortals or gods).

Everybodys All American's picture

Broken up or declared bankrupt and insolvent? I don't see the banks being broken up but I do see if it does happen they first will take the world financial system to it's knees.

Husk-Erzulie's picture

Thanks George, great, deep post.  Much appreciated.

janchup's picture

The Alien in the White House will never be able to wrap his mind around this, particularly with Tim Geithner jabbering in his ear.

Seer's picture

The guy who received more money from the banksters than anyone else?  No, his program contains no such option...

SwingForce's picture

They've tried to heal the economy from the top down and it didn't work: Banks did not dispose of their toxic crap, they took TARP money and didn't help homeowners. They are in a big rush to foreclose and resell at a loss so they can charge The Taxpayers for the losses before the ether wears off. Why are The Taxpayers helping the Banks? 

Maybe The Taxpayers should help The Taxpayers: Start from the bottom up, despite all the opposition to helping underwater borrowers. Because they didn't cause the housing market to drop, on the contrary, they were part of the rise higher. Look, there are parts of historic West Palm Beach, FL 33405 that have lost 25% of their value in 2010 alone! On top of the 40% drop from 2007-2009. The number of strategic defaults can only rise in the future, so why not some TARP money for homeowners?

If the TARP money for the banks was to cure their RMBS problems, then why didn't it flow (in reverse) all the way down to the homeowner? (Maybe because the bankers couldn't pay bonuses that way?). What is SunTrust doing with the $5 Billion it still has from TARP?

As painful as it is for most of you to give money to underwater borrowers, these are better people than The Banksters. Start at the bottom. They will spend money again at Home Depot & Lowes, who will hire more workers. Many independent contractors and small businesses rely on the home improvement sector, can you imagine the "upward- cascading effect" this money flow would produce? Painful as it is, Mr. Responsible, whatever business you are in, it would benefit from this plan.

Defaulting homeowners, if cured, would put money into the economy FASTER than The Bankers. Ouch.

P.S.- This can be done without the "help" of The Courts, think FNMA & FreddieMac.

Seer's picture

People bought the BS hook, line and sinker, that they should mortgage their future for a non-performing asset.

But... as they say, timing is everything.  I sold before this thing blew up, therefore I was someone who profited by it.  It's not a bragging point; I only ended up in that position once I started to question the sanity of the entire System.  It is, however, just another data point along the status quo path, where this kind of stuff happens everywhere, and at all scales.  There is a fundamental dishonesty that permeates our society/civilization, and that's that we can produce/grow our way to prosperity, that there are no physical limits.  Almost to a person, we lied ourselves into this mess; and, everywhere I look (even a good portion of folks here) people are trying to lie their way out.  It's pretty clear what the results are going to be.

Madcow's picture

Hasn't that been the plan all along?

Just let JPM collect all the trash and paper precious metals and toxic derivatives with Fed money ...

And then pull the plug on JPM and "poof" - problem solved.  Like loading all the nuclear waste on a rocket ship and sending it off to the sun. 

spinone's picture

I thought the plan was to load up the FED with all the crap and then poof!

Seer's picture

I'd mentioned this for several months now.  Seems that people are now starting to see this as the intent (if it's not the intent, it sure as hell is looking more like the actual outcome).

benb's picture

These last two comments sound closer to the truth to me. What’s left of hard assets is being plundered out the back of the stage while the American people and the Europeons watch the kiddie show on the other side of the movie set. Very possible at a certain point they’ll pull the rug out from under the whole hollowed out mess and we’ll all go running into the arms of the new “Global” authority. (IMO)

spinone's picture

Another way - end contributions to politicians and make all campaigns publically funded and give them free airtime.  No more employment revolving doors between regulators and the big banks.

More_sellers_than_buyers's picture

The basic context of this is true.  When Giants get this big there is NO incentive to try to compete against them...small and mid size banks are effectivley locked out of getting bigger because the playing fiels is so uneven.  So rather than try, they sell out or fade away.  Sad and very un-American.  Maybe instead of handing out petty fines to justify their jobs regulators can punish the guys that are gaming the whole freakin system. Alas, its not just the lack of effort on the part of regulators, I fear none of them are smart enough to handle the job.  Good by good old fashion hard work to get to the top.  The game is rigged.

Seer's picture

The AIM of capitalism is to capture as much shit as possible.  Those mid-sized and small banks are wanting to be big banks, that's the program.

Food, Shelter and Water.

As Nixon's Ag secretary, Earl Butz, stated- "Get big or get out."  That's the mentality.

Regulatory bodies, you know, those socialist entities, get corrupted by the BIG corporations, thereby ensuring that the BIG corporporations stay in power: after all, we have to protect their "intellectual" property...

Capitalism would not, nor could not resolve this.  The problem is having something that has the capcity to force the BIG entities to be broken up; unfortunately it requires a BIG government.  Fuck!  BIG = FAIL!

spinone's picture

when the big banks are bailed out - subsidized - they have an unfair advantage.

MarketTruth's picture

Break up the big banks? Not going to happen without major effort from the House/Senate/CONgress/etc, yet as we know many in those positions are pwned by the Fed.

The treasury will NOT push for bank breakup.

REMEMBER THIS FACT: The major banks are members that own the Federal Reserve. As we all now, the private Federal Reserve will do anything to ensure their member make money/profit/power... from eliminating their competition to outright murdering people to keep themselves intact.


As ZH pointed out yesterday, the Fed has found a scam that gives their members over $2.4B (Federal Reserve Loses $2.4 Billion In Taxpayer Money In Most Recent QE2 POMO Interval) with US taxpayers being the bag holders. Of the banks, by the banks and for the banks.

So when i hear break up the banks, you'll need to break up the private banking cartel scheme called the Federal Reserve first, including their EU and UK City Of London counterparts which also includes the central bank IMF sister company.