The Missing Witness

Yesterday’s JEC Hearing on Too Big To Fail did not include any financial industry representatives.  This surprised me – surely they want to go publich with their views on the future structure of the financial system?  Obviously, they have great behind-the-doors access on Capitol Hill, but surely it is not in their interest to have right, left, and center piling on with regard to breaking up Big Finance?  Yesterday, Thomas Hoenig, Joseph Stiglitz, and I were in complete agreement on this point, and my idea of using antitrust measures against major banks seemed to gain traction during and after the hearing.

Apparently, the committee invited a number of leading people from the industry (i.e., individuals who generally articulate the case for big banks) and they were all too busy to attend.  This is a curious coincidence, because someone else – in an unrelated initiative – has been trying to set up a discussion involving me and people from the Financial Services Roundtable and/or the American Bankers Association, to be held at the National Press Club, but their calendars are completely full (i.e., there is literally no day that works for them, ever).

There has been some counterargument – e.g., against our Atlantic article on American oligarchs – from people who wish to defend the way that big finance currently works, but so far this has been quite limited in the public domain.  The most pushback so far probably came from Carlos Gutierrez (Commerce Secretary, 2005-09), who argued Monday on CNBC that our argument is “somewhat sensationalist” and that it would lead to a wholesale and unproductive assault by government on the finance industry (i.e., an application of the Economics of Vilification).

But of course our argument, both in the Atlantic and more broadly, is not against finance per se.  In fact, we’ve received some strong expressions of support from within the financial sector – just not particularly from firms that are Too Big To Fail – as well as from many in the risk-taking entrepreneurial sector.  And here Thomas Hoenig – President of the Kansas City Fed, with long experience regulating, winding down, and generally overseeing banks; and very far from being a sensationalist – absolutely nailed it towards the end of yesterday’s hearing.  My recollection of his exact wording is: whenever you have banks that are too big to fail, you will get oligarchs (yes, he said oligarchs).

Perhaps Mr Gutierrez and Mr Hoenig can be brought together in some form of public discussion?

Originally published at the Baseline Scenario and reproduced here with the author’s permission.

4 Responses to "The Missing Witness"

  1. Guest   April 22, 2009 at 10:32 am

    Who in the industry would want to attend such a public hanging where the attendee is the one hanged?

  2. Guest   April 23, 2009 at 12:42 pm

    Hurray for noble technocrats like Simon Johnson, Thomas Hoenig, Joseph Stiglitz! Perhaps there is a chance that the US and the world will avoid a lost decade of their own after all. Keep the pressure on gentlemen – and Godspeed to you all!

  3. Anonymous   April 26, 2009 at 4:50 am

    If companies are too big to fail then they should not be too big. Period. For sure the large financial insitutions should not be alowed to be there. What we have now is the following: regulators who failed to understand what was going on, together with bankers who earn too much to understand what they were doing, together with politicians who get the money from the financial guys for their campaigns, together with auditors forced to accept what the bankers are saying. Everybody together saying to the public that they need money from tax payers to save the lives of the own tax payers. So, that fault is not from the regulators, is not from the bankers, is not from the auditors is not from the politicians, it is from the “market”. In the meantime the usual suspects have put an enormous amount of money in place to buy the “distressed” assets from the portfolios of the banks. The price is higher than it should be because bankers and govs agreed that bankers need to be saved. As the money will come from tax payers they will loose first. Want a proof of the big scam? On Mon 20th banks falled. On Tue 21 Geithner goes to the FT to say that banks are capitalised and Ok. Bank shares go up. On Wed 22 the CEO of one of the usual “suspects” which will benefit from gov money to buy the assets go to the FT to say why he is worried with the assets in the banks. (see El Arian in the FT article on Wed Apr 23). GS has put together 164 bi to buy those assets on the cheap.Why are the credit indices not yet on exchanges? Ans. It is not in the interest of “usual suspects” (read: large financial institutions that will profit from the lack of transparency). Once all of this is solved, and the GSs of life will have made their money, then they will come and put in place the standardised credit indices traded in exchanges.This is a tactic I have only seen in emerging markets and I never thought it would happen in the US. Nor the public neither the authorities understand it and I am not sure if things would improve much have they come to understand it. The authorities are now at the side of the bankers. We have now the Oligarchs driving the ship my dear.Thanks.