Too big to fail is too risky an idea

We are never going to get out of this mess if we don’t let banks fail.

So says Allan Meltzer, one of the world’s foremost experts on monetary policy. He is currently writing “A History of the Federal Reserve, Volume II.”

MY OPINION: THOMAS OLIVER
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Interviewed on EconTalk, Meltzer said the too-big-to-fail policy is an invitation to risky banking.

Can you say Citigroup?

Can you name a time since its historical merger with Travelers in 1998 when Citigroup, or Citibank or just Citi, wasn’t in some kind of mess? Its boardroom has a platinum surround sound system for the musical chairs it plays with CEOs.

More than one banker in Atlanta has told me that Citi isn’t too big to fail. It’s too big to succeed. It is unmanageable, with over 200 million accounts in over 8,000 branches in over 100 countries.

It has also received six rescue operations in the past two years. Its stock is trading just above penny-stock status.

And so in a world that Lewis Carroll could appreciate, you now own controlling interest in this financial behemoth. Thirty-six percent. Of what, is anybody’s guess.

But — again one thinks of Carroll or George Orwell — don’t confuse the government owning controlling interest in a bank as nationalization. It’s not.

Cause they said it’s not.

Those who know the origin of this mess find it hard to understand how anyone could start the time line eight years ago. The later half of the 1990s is when most of the seeds were sown and no better example is the changing of the laws that allowed banks to buy investment-banking firms. Hence Citi. (Not to mention the easy money policy of the Fed, Congress pushing Freddie and Fannie into buying up subprime mortgage securities and the decision that derivatives didn’t need regulating.)

Meanwhile, for those banks not too big to fail, we have the FDIC performing as advertised. Stepping in and dealing with troubled and failing banks.

While the Fed and Treasury can’t seem to deal with toxic assets, the FDIC just completed the sale of another $1.5 billion in troubled real estate loans, otherwise known as toxic assets.

In five separate transactions, the FDIC has sold $3.2 billion of assets seized in its takeovers.

And while few were paying attention, the FDIC last month sold IndyMac to a group of — da dum — private investors for $14 billion.

Remember IndyMac? The California thrift that collapsed last summer. It was one of the largest bank failures in U.S. history.

Second-largest, until Washington Mutual failed a few months later.

Neither, nor their combination, caused systemic failure.

Moral hazard is a term thrown about these days. It’s what happens when risky behavior is rewarded.