How did banks get “too big to fail”?

How did banks get “too big to fail”?


JPMorgan Chase … maybe you’ve heard of it? If it was a country, it would have the Bigger than Brazil. Bigger than the Canada. Bigger than Russia. Hi. I’m Justin Johnson from Attapulgus, GA and I’ve always wondered The five biggest banks in the U.S. hold almost half the assets of the country’s entire banking industry — more than $7 trillion. So how did we get these giants? ‘Cause it wasn’t always this way. I paid a visit to Frederic Mishkin. He’s a professor of banking and financial institutions at Columbia Business School. He literally wrote the book on banking and finance. Literally, he wrote, like, five textbooks. Well over a million students have used the book. Yeah, I have. I’m one of them. Oh, good! In the ’20s, we had 30,000 banks in the U.S. By the ’70s and ’80s, we had about 15,000. And today we have about 5,000. Now nobody’s saying that we lived in a bank utopia back then, OK? We had a lot of banks, yes. But they actually… they kinda sucked. Even though there were all these thousands of banks, they weren’t actually competing against each other. They weren’t allowed to. State laws said you could only operate in one state at a time. Some states had laws saying you could only have one branch in the whole state. Why did they have these laws? ’Cause banks had lobbied for them. This actually was a way for banks to not be as competitive, and when you’re not as competitive, you actually can basically not give the consumer as good a deal. And particularly if you’re a bank in one state, you don’t want to have people from other states come in and take away some of your business. So you’ll fight like hell to keep them out.” So what changed? Well, over the ’70s and ’80s, the argument that consumers would benefit from more competition between banks started to gain traction. And it became clear that having too many local banks was risky. Local banks depend on local economies, and local economies fail. Texas, for example, in the ’80s was dependent on oil. When the price of oil fell, the economy there suffered and hundreds of banks went under. Then in the ’90s, the federal government stepped in and said, Yeah, we’re gonna allow interstate banking. We’re gonna allow one bank to buy up another bank. We’re gonna allow one bank to operate in more than one state. And that’s what they did. We’d like the government to always act in our interest, but frequently if there’s very powerful businesses, they can actually get the government to do their bidding. And in this case sometimes restrict competition. So as these banks are getting bigger and bigger and bigger, we start hearing the phrase It doesn’t mean that they’re too big to actually fail. They can totally fail. The problem is if they do, it would be a catastrophic disaster. And it was. If you let them go under, you have a crisis. But on the other hand, if you always are going to rescue them, then it makes it more likely to take risks that can create a crisis. And if everyone knows that the government will step in if something goes wrong, then people are less likely to pay attention to what that institution is doing. So the result is that you need to think about deciding either not to bail them out at all, which I think we realized is going to be problematic, particularly after Lehman Brothers. Or alternatively, yes there is this bailout that we’re going to do in the future, but we know then that we actually have to go in and regulate them — go in and check their books to make sure that they’re taking on less risk. So how did banks get “too big to fail?” Well, we started with banks that were too small to not be terrible. They were isolated and not very competitive. So we let them compete. We allowed them to merge with other financial institutions, and they did. Every time there was a crisis or a bank failed, another bank gobbled it up. They got bigger and bigger and bigger. And so here we are… With banks as big as countries and getting larger all the time.

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About the Author: Maximilian Kuhn

14 Comments

  1. When u got 250 trillion in derivatives like the us banks have it doesn't matter how big u are , when these derivatives go south it'll turn u into a third world country…

  2. this guy (Prof Fredrick Mishkin) was antagonized in 'Inside Job' for essentially getting lobbied or not opposing the lobbying and here he wants to stop lobbying. Economics is f***ed up…

  3. Quit letting banks consolidate. And its not the American people who deem them TBTF. Congress and the FED made those decisions. Lehman was as big as any with $636b in assets. It wasn't Too Big To Fail??? And why? Because the Sec. of Treasury at the time, Hank Paulson let them swing in the wind to their own demise. Everybody got socialism in 2008 unless your name was Lehman Bros. They got a hefty dose of capitalism. Your broke/ eat it/ own it/ drink it down and drain it !! You made a rotten pie!! Now eat it!!!!! People don't know that Paulson was the former CEO of Goldman, a nemesis to Lehman. And OMG, why did the government single out Lehman for collapse ?? Well, I just don't know, maybe were all idiots — THEN AGAIN, maybe were not, and it was Paulson's intention to bring them to their knees. Paulson made a phony effort to sell Lehman to Barclays over a week end !! The Brits craw-fished, and Hank famously said, "the Brits screwed us." No, the Brits didn't want to buy a pig in a poke, and Paulson knew that. He buried Lehman on the pretense of trying to save them. What a crooked liar !!! Nobody buys that size company over a weekend. If the Fed had just opened the window, Lehman and Bear both be alive. THE FED opened its window to FORIEGN BANKS people !!!! RBS, UBS, Soceity General, Credit Swiss — on and on and on it goes — over $2 trillion to foreign banks, but nothing for the home team, Lehman and Bear. Not that Lehman and Bear should have been saved but saving foreign banks while our own collapse — something aint right there. And something aint right w/ Paulson. He's is fishier than three oceans!!! You wont get this info. ANYWHERE else; some of us Americans know what is goin on !!!! Not a soul in the Trump administration would explain this to you !!!!! Notta one !!! Sad situ.

  4. WHERE OH WHERE is the 'utubby' about "WHY bankers didNOT GO 2 JAIL' hmmm toooooContra-vers-AL' Ehhh …. Citizen.org veteransforpeace.org splcenter.org www.workersdefense.org more on my FBK

  5. LOL – Banks subtract from Innovative Industrial GDP . Who put this cost in the wrong column?
    Who is going to write Gross Domestic Product For Dummies ?

  6. A gay dude asking a Jewish professor whose adviser was another Jewish Israeli, whose advisor, in tun, was another Jewish Israeli. GTFOH.

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