One issue that seems to be conspicuously missing from the current discussion with regard to the financial crisis and the Treasury bailout is the acceleration of consolidation within the banking sector. Why aren’t more people talking about this?
If a major rationale behind the bailout is the “too-big-to-fail” concern then why are we allowing the likes of Bank of America, Citigroup and JP Morgan Chase to get bigger as a result of this meltdown? Risk is now very narrowly held across these three big firms which we have learned is not such a good thing. Plus, consolidation always hurts consumers by limiting choice and increasing fees.
Instead of creating more Frankenstein-monster megabanks that would be “too big to fail,” we should be considering, as economist Joseph Stiglitz told a House committee yesterday, breaking up the leviathans into smaller institutions that focus on making prudent loans and investments rather than gambling in exotic financial casinos. But that’s not the kind of policy we’re likely to get as long as a veteran Wall Streeter such as Paulson is running the show.
Imagine what will happen if any of these institutions come under a liquidity crunch? Talk about a moral hazard that has been created. Going forward, regulators must step in to make sure these three companies aggressively lower their risk profile by deleveraging their balance sheet and succumb to greater regulatory oversight. Sure, this will affect profitability but the alternative at the moment is far less appealing.
Welcome to the future of U.S. banking.
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