Friday, August 28, 2009

Even Bigger Banks and the Coming of Finance Socialism

According to David Cho of the Washington Post, big banks like Morgan Stanley, Bank of America, and Wells Fargo have become considerably bigger as a result of last year's financial meltdown.

J.P. Morgan Chase, an amalgam of some of Wass Street's most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue of of every two mortgages and about two of every three credit cards, federal data show.

A year after the near-collapse of the financial system last September, the federal response has redefined how Americans get mortgages, student loans and other kinds of credit and has made a national spectacle of executive pay. But no consequence of the crisis alarms top regulators more than having banks that were already too big to fail grow even larger and more interconnected.

It almost goes without saying that a higher level of concentration in the banking industry means that the next financial meltdown is going to be even worse--much worse. The Obama administration and the Federal Reserve Board were able to get through the last crisis because there was some margin for error. When BearStearns went belly-up, it could be absorbed by Morgan Stanley. The same with Merrill Lynch being absorbed by the Bank of America.

But there not going to be any Plan B for failed big banks next time. Last year, the "big banks" were "too big to fail." Next time, the even bigger big banks will be "too big to save" within the framework of private corporations. Morgan Stanley and Wells Fargo are plenty big, but they're not big enough to absorb teetering monstrosities the size of Citigroup or Bank of America. The only answer to the failure of "bigger big banks" will be to nationalize them.

Whether we like it or not, "finance socialism" has almost arrived.

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