Bernie Sanders wants to break up the banks that took bailout money, creating smaller banks that are no longer "too big to fail." What are people's thoughts on this proposal?
The type of separation he's talking about would limit the ability of banks to affiliate with each other in a risky manor, as they had leading up to the crisis.
In an attempt to accomplish this, Elizabeth Warren has drafted a reasonable, 21st century take [1] on Glass-Steagall, which Senator Sanders supports.
But an investment bank alone can still be too big to fail, it's about the contagion effect caused by the banks being deeply intertwined with each other.
I think the key issue is that, if an investment bank fails and takes all of its investors money with it, well that's kind of like a startup failing. Investors know the risk. But right now, if a bank fails due to its bad investments, it can take the money / deposits / savings of many, many people that did not take any risks with their money.
> But right now, if a bank fails due to its bad investments, it can take the money / deposits / savings of many, many people that did not take any risks with their money.
This is not something which occurred during the GFC. We saw:
1) A significant number of pure retail banks making bad home loans, failing, and losing their depositors money. (Eg, Countrywide.)
2) A small number of pure investment banks (or in one famous case, an insurance company) getting on the wrong side of volatile markets or making exotic bets that went bad, and losing their investors money. (Eg, Lehman.)
3) A number of diversified banks which got into trouble on one side or the other, but were able to weather the storm without significant losses. (Eg, Citi.)
What we did NOT see is any large banks which got into trouble on the investment side, and lost money on the deposit side.
2) The Insurance company you allude to is likely AIG, who decided to provide industry wide insurance for the CDO which were themselves intended to distribute risk, which basically de-distributed the risk by rolling it up under their own single company. Lehman Brothers was a victim of apparent politics as to why they weren't bailed out while others were?
3) Citi required $20 Billion in taxpayer assistance via TARP. I don't know about you but that doesn't sound like weathering the storm.
I don't think you really understood what happened or have a very clear idea of the facts of the situation given your stated points.
That's assuming investment banks and retail banks aren't connected by being counter-party to each other on all number of contracts. You saw when Lehman failed it almost took out the financial system and banks, insurance companies etc all had to be bailed out.
In an industry-wide crash, as was the case in 2008, it doesn't really matter whether a dozen smaller banks fail or a few bigger ones do. And on the flip-side, big banks are a lot more efficient than small ones, for the same reason Wal-Mart and Amazon are more efficient than mom-and-pop stores. Everyone loves to hate Amazon, but who wants to go back to the days before same-day drone delivery? Similarly, who wants to go back to the mortgage rates that existed before big banks and securitization?
If there's a dozen\* small banks it seems less likely that they would all fail at the same time than if there's only three humongous banks. Diversity and all that. Hence, we could limp along with 6/12 small banks rather than being screwed and having no financial system if all 3 major banks go belly up.
\* Specific numbers obviously made up for illustrative purposes only.
That's true if bank failures are uncorrelated, which is so far from reality as to be an irrelevant assumption.
If this were true, then the US banks should have weathered the financial crisis far better than Canada's (highly consolidated). That's the complete opposite of reality.
> And on the flip-side, big banks are a lot more efficient than small ones, for the same reason Wal-Mart and Amazon are more efficient than mom-and-pop stores.
I don't care much for efficiency when it allows for the penalty-free violation of the law. Efficiency isn't the end all, be all metric.
I am always opposed to government interfering into private businesses and I don't like think "I will break up big banks" attitude.
I would support a legislation that says no bailout money to any private company ever. If something is too big too fail the investors would shy away from investing into it.
I don't think this is the correct approach, it's not the size of the company that is the problem. In fact large companies (not monopolies) can produce/offer services/products that smaller companies can't due to the scale (i.e. mobile banking). What should happen is the employees or execs responsible should have gone to jail for life for the destruction they caused providing a deterrent effect, and also much stronger regulation policed by a truly independent regulator with the teeth to act.
In China people can be sent to jail for 'causing destruction' but in western countries you have to have been proven, beyond reasonable doubt, to have broken a law.
Most of the activities the banks were carrying out that contributed to the crash were well known long before the crash, and were not illegal and they weren't being called out for it. In fact many politicians and the public were keen for broader availability of cheap loans. So yes, we need better regulation of financial institutions, but there were many causes of the financial crisis and blame lies in many places and many lessons learned, but you can't apply laws retroactively or arbitrarily.
Is it necessarily a bad thing to have a smaller finance sector? The talent won't really do nothing but would go to other sectors. "Winning" finance just means that you're more exposed to the financial crashes.
IE compare how Germany fared during the financial crisis compared to the UK.