My Christmas Wish

Charles N. Steele
Issue CCLXXI - December 25, 2010
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When I was a young lad, our house used to receive a phone call each year on the evening of December 24.  Our father would always answer, and suddenly, with great urgency, call me and my brothers to the phone -- for a long-distance call from the North Pole.  Santa would always quiz us about our behavior over the past year, and then ask whether we had any particular wishes for things he could bring.
I kind of wish he would call now, because there's something in particular I would like to request as my Christmas & New Year's wish: could someone please get the Too Big To Fail banks and banklike entities under control?
MSNBC Business has just posted a fascinating and horrifying story detailing how Merrill Lynch executives cooked up a scheme that ultimately enriched themselves while putting Merrill Lynch on course for financial catastrophe.  In essence, they created bad mortgage-backed securities that no one wanted to buy, next created a new branch of Merrill Lynch that was tasked with buying the unmarketable securities, and then paid themselves big bonuses for these sales ("millions for billions", they called it).  Eventually these MBS, and Merrill Lynch, went bust, leaving U.S. taxpayers stuck with the bailout bill while the scoundrels who orchestrated the scheme walked away with millions.
Recently the President of the Kansas City Federal Reserve, Thomas Hoenig, warned that our problem with TBTF banks is even worse than it was in the run-up to the recent financial crisis.  Our banking system is more concentrated than it was, not less, there's been no change in the incentive or regulatory structures, and the implicit guarantees of bailouts are even stronger than before.  Why shouldn't financiers cook up get-rich-quick schemes for themselves, since the taxpayer is there to bail out the system if needed?  Privatize the profits, socialize the losses -- that's the new model for finance.  Hoenig suggests we'd better think seriously about breaking them up and reducing their subsidies, and soon.  I concur.
Unfortunately, currently there's little support for this in Congress.  Paul Krugman correctly laments that the Republican members of the Financial Crisis Inquiry Commission have refused to assign any blame at all to Wall Street.  Similarly the Democrats' financial overhaul bill is essentially toothless in getting the financial system under control.  Hence we are, in many respects, in a worse place than we were in 2006. Our banking and finance system is dominated by giant, politically well-connected, subsidized, less-than-reputable megabanks.  It's not exactly a competitive free market out there, to say the least. 
I suppose a breakup of the TBTF banks isn't something that can be fit into a sleigh.  May I then ask, Santa, that you give the next Congress, and especially the new Tea Party members, plenty of courage and backbone, plus the sense to do the right thing and go after these monsters?  That's my Christmas wish.
Regardless of what happens, to all of our readers... Merry Christmas!

This article originally appeared on the blog, a new forum for the expression of economic ideas by professors Charles Steele and Gary Wolfram of Hillsdale College.

Dr. Charles N. Steele is the Herman and Suzanne Dettwiler Chair in Economics and assistant professor at Hillsdale College in Hillsdale, Michigan. His publications include papers on the Soviet economy and economics of transition, economic growth, and institutional change.  He received his Ph.D. in economics from New York University in 1997, and has subsequently taught economics at the graduate and undergraduate levels in the People’s Republic of China (China Agricultural University), the Russian Federation (Moscow State University), Ukraine (Economics Education and Research Consortium, National University Kyiv-Mohyla Academy), and the United States (Montana State University). He has also worked as a private consultant in design and review of USDA crop insurance programs with Watts and Associates, Inc.

In addition to economics, Steele's interests include trail running, mountaineering, snowshoeing, and similar outdoor pursuits. He's completed 26 ultramarathons, ten triathlons, and is a nine times finisher of The United States' oldest 50 mile race, the Le Grizz Ultramarathon.

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