What does it really mean for an institution to be too big to fail? The idea is that some banks and companies are so big and integral to the national economy that if they fail, it will cause disastrous ripple effects for the economy and cause a wave of bankrupt corporations and failed banks.
Proponents of this idea of “too big to fail” argue that the only solution available to government is to bail out distressed institutions which are too big to fail. Critics of this idea argue that the failure of these institutions would not be as disastrous as claimed.
This talk about "too big to fail" is probably nothing new to you. It certainly isn’t new to me. Like most people, I’ve been uncomfortable and angry about the huge amounts of money the government poured into failing institutions. I’ve never done much about it, because at the end of the day none of us average citizens have much say in this debate or in the resulting government policies. If you’re not a politician, government regulator, or bank executive, your opinion on the issue doesn’t count for much. After much thought about the issue, though, I’ve concluded that this doesn’t mean we’re powerless to influence the future of these big institutions, and I think that there are good reasons for us to exercise our power to change them.
The bailouts given out by the United States government were mostly done under the Troubled Asset Relief Program (TARP). The U.S. Treasury has spent over $200,000,000,000 ($200 billion) bailing out banks,1 and another $100,000,000,000 bailing out other institutions (such as AIG and the automotive industry).2
If they are too big to fail, then they are too big
Whether or not the TARP recipients were really too big to fail, something needs to be done. If these institutions are not really too big to fail, then it means their lobbyists are too powerful. It means that these institutions managed to fool the U.S. government into offering a huge unneeded bailout. If they managed to fool the government so badly, then we must make these banks smaller to ensure the health and vitality of our democracy.
But even if the banks really were too big to fail and TARP was a necessary program, we still need to make the TARP recipients smaller. When institutions become so big that they can rely on the government to immunize them from the consequences of their leaders’ bad decisions and stupid risks, we have a big problem. You don’t have to be an economist or social scientist to understand that programs like TARP will encourage executives at big banks to take bigger risks than they otherwise would – if the bank succeeds, it will reap the benefits (and the executives will get their bonuses), and if it fails, then the U.S. taxpayer will cover the loss.
Mervyn King, the Governor of the Bank of England (somewhat akin to the Chairman of the Federal Reserve in the United States), very aptly summarized the problem:
If some banks are thought to be too big to fail, then . . . they are too big. It is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure.3
Part of the beauty of a properly functioning market economy is that competition prunes out the loser institutions. Poorly managed businesses will naturally fail, and the resources being put into those businesses can be freed up to be used more productively elsewhere. Nothing should be too big to fail. Failure is essential to the orderly functioning of the economy: poorly-run institutions should fail to make room for well-functioning institutions to succeed.
A Solution
It thus does not matter whether the banks were too big to fail or not. Either way, they are too big. When presented with situations like this, most people just say “someone should do something about that” and then ignore the problem. But politicians and government regulators have been completely unwilling to take drastic action, such as breaking up the big banks (which is what Alan Greenspan suggested4) or taking other less drastic steps to address the problem. If “someone” is going to do something about it, it has to be you and me!
But what can average citizens do? Here’s my solution: take your money out of the big banks. The only reason the big banks are so big is because people keep their money there. If lots of us started closing our accounts at the big banks and depositing our money somewhere else, the banks would get smaller.
Not Too Big
Let’s make sure that no banks is ever again too big to fail. The easiest way to determine whether an institution falls into that the “too big to fail” category is to see whether they received TARP funds. Each bank that received TARP funds had to fulfill the U.S. government’s TARP participation criteria. This means the government believed that the institution was too big to fail. And each bank that accepted TARP funds also implicitly acknowledged its belief that it was too big to fail. So if you want to stop banks form being too big to fail, here is all you need to do:
1. Find out if your bank received TARP funds. To find out, you can search for it here or look on this list. If you didn’t find your bank on the list, it is very possible that it still received TARP funds. A lot of smaller “local” banks are actually owned by larger bank holding corporations. For example, National Bank of Arizona is not really an Arizona bank. It is owned by Zions Bancorporation,5 which is the 34th largest bank in the United States, with over $51 billion in assets.6 You can quickly find out if your bank is subsidiary of a bigger bank holding company by doing a quick search on Google or Wikipedia (or even easier, just call your bank to ask).
2. If your bank is a TARP recipient, close your account with your bank. Make it very clear to them when you are closing the account that you are closing your account because the bank was a TARP recipient and that you are trying to do your part to shrink the size of the the bank to make sure that it will not be too big to fail, and thus a threat to our national economy (and, potentially, our political system). Be pleasant, but firm, and make it clear that you are not withdrawing your money to penalize or attack the bank, but out of a sense of civic duty to protect our national economy and the integrity of our system of government.
3. Third, deposit your money in a small community bank or into a credit union (these were the types of institutions that avoided making the risky loans that caused the financial crisis in the first place – we should reward theirresponsibility). Some people have claimed that having these big mega banks is good for the economy because they can achieve economies of scale. Well, credit unions consistently have better interest rates and lower fees than the big banks,7 so it seems like their small size hasn’t really been an obstacle to their efficient functioning so far.
4. The big banks derive a lot of their revenue from credit card use. If you have a credit card that has been issued by a bank that accepted TARP funds, consider canceling it and getting a card from a smaller institution. If you are worried about whether canceling the card will affect your credit score, then just stop using that card and start using a card from a small institution.
Addendum: this is not about anger
I started writing this post a few months ago, but never quite got it polished and ready to post. Since then, the Occupy Wall Street (“OWS”) movement has taken off, and along with it, a movement to penalize big banks by encouraging people to take their money out of the big banks and put it into credit unions. The people involved in this movement are explicit that they are motivated by their anger with the banks and the feelings that the big banks are acting unjustly. Anger against your fellow citizens (even if they are bank shareholders and executives) is a terrible way to motivate and sustain a political movement. Anger leads to irrationality. Anger divides communities and sets people against each other (for example, just look at the “53%” movement which has already formed in opposition to OWS).
The OWS crowd have even set up a Facebook event encouraging people to take their money out of the big banks all on the same day. If they’re actually successful in creating a mass movement, it is a recipe for starting a run on the banks. A run on the banks would just create a second financial collapse.
Let me be clear: what I’m advocating is not motivated by any animus for big banks, or by any desire to hurt them or penalize them. Like I said before, many big banks are actually bank holding companies that own a number of subsidiaries. Other banks are the product of growth or many acquisitions of smaller banks. We need a gradual and sustained movement to show the banks that, if things stay as they are, people will continue to withdraw their money. We don’t want all of the big banks to collapse – we want them to get smaller. A gradual and growing movement will give the big banks time to shrink in an orderly fashion, hopefully by spinning of their subsidiaries or by splitting themselves into smaller independent units.
This is about us normal citizens rationally taking actions to get the result our leaders have failed to seek, to make sure our country’s economy stays healthy and robust. Don’t take your money out of your bank because you’re mad. Take your money out because it’s the right thing to do to make sure that we never have a set of banks that are so big they can demand hundreds of billions of bailout dollars to survive.
If, like me, you’re concerned about the state of our economy, and the risks of continuing to have giant banks that can demand government largess to help them continue to operate, but don’t feel terribly sympathetic to the Occupy Wall Street movement, please help spread the word. You can do something to help our country without becoming an unproductive Angry Protester.
Footnotes
