The raging debate that has now begun is the idea of “no more bailouts” and no more banks that are “too big to fail.”
The only way to prevent banks that are too big to fail, and the only way to prevent massive future bailouts, is to break up the banks the way America did after the Great Depression.
This would create more capitalism, not less, and lead to fewer bailouts, not more, which will be the result of the current system.
It is time to bring back the Glass-Steagall Act, which separated the highly speculative financial firms that took great risks as their core business from the conventional banking firms that are supposed to lend money to consumer and business customers as their core business.
The mistake was made at the end of the Clinton administration when a bipartisan deal, fueled by Wall Street lobbying, broke apart the regulatory limits and set loose the speculative fanaticism that caused our current crisis.
Paul Volcker has been waging a wise, heroic and failed battle to restore the wall between those who hold depositors’ money and those who engage in wild speculation. In fact, the bailout made the bad problem worse, creating mergers that made big banks even bigger, increasing the risks that the bailout was designed to reduce and insulting taxpayers by making them pay for the deals.
It was wrong to merge Bank of America with Merrill Lynch, wrong to merge JPMorgan with Bear Stearns and appalling that taxpayers were forced to subsidize these deals.
Now banks that were bailed out to lend often don’t lend. The speculation that caused the crisis is more rampant than ever. The public revolts against compensation and bonuses that are radical and extreme, but this will continue under the current scheme, whether compensation is based on cash or stock.
Heaven help the American people and the integrity and stability of our financial system if the road to riches is to jack up stock prices in a system where the push for higher stock prices is driven by animal speculation that remains locked together with the savings of Main Street America.
Today the banks that lend and speculators that risk are being merged into even greater conglomerates that magnify the problem even more than the conditions before the bailout. Those that were too big to fail have gotten bigger. The risks that were too great to exist have gotten riskier. Lending lags, speculation soars, compensation shoots to the moon, the jobless economy becomes even more jobless and public anger spreads like brushfire.
The problem is not size, per se. The problem is that by mixing the money of speculators and depositors, which inevitably leads to danger, when danger strikes, the only way to protect the economy as a whole and Americans as a people is to bail out the whole big blob.
America should protect the money of depositors, but should not protect the money of speculators. America should guarantee the savings of average Americans, but should not insure the losses of speculators. Americans are willing to pay up to protect the nation as a whole, but not to subsidize a system that scams them while guaranteeing a future crisis and future bailouts that will cost them.
Paul Volcker is right. No more bailouts. Break up the banks, or more bailouts are coming.
Budowsky was an aide to former Sen. Lloyd Bentsen and Bill Alexander, then chief deputy majority whip of the House. He holds an LL.M. degree in international financial law from the London School of Economics. He can be read on The Hill’s Pundits Blog and reached at firstname.lastname@example.org.