Too Big To Fail: Banks, Bikinis, Toddler Throwing and an Amy Schumer Joke

Stan:   I got a hundred-dollar check from my grandma and my dad said I need to put it in the bank so it can grow over the years.

Bank Manager:  That’s fantastic, a really smart decision, young man.  We can put that check in a money market mutual fund, then we’ll re-invest the earnings into foreign currency accounts with compounding interest aaaand . . . it’s gone.  – South Park

I hear the Slovakian banks moved to digital currency.  They ran out of Czechs.  It’s okay, it’ll be fine.

Last week we talked about the Angle of Repose (The Funniest Post You Will Ever Read About Angles of Repose, Virgin Physicists, Economics, and Population).  The conclusion, stated briefly is that our economy and indeed our civilization can be compared to a sandcastle.  Like a sandcastle, the economy is built out of a myriad of individual particles, glued together by innovation, hope, aspiration, and desire to watch free naught movies on the Internet.  Like a sandcastle, if the conditions aren’t just right, the walls of the sandcastle can crumble in a growing cascade.  An even faster way to make the castle fall is to drop a shot put on it.  It’s especially fun if the five year old that made it is still working on it when you drop the shot put.

Sadly this Canadian shot putter was disqualified after it was identified she was taking age-accelerating drugs to age more quickly so she could qualify for the Senior Olympics®.  Her only defense was, “I identify as 86 years old.”

Unlike a sandcastle, our economy isn’t made of grains of sand of rough uniformity.  If the average person’s net worth of $97,000 was a single grain of sand weighing 0.011 grams, Jeff Bezos’ $110 billion dollars would be a 28 pound steel ball, the perfect size to ruin a kid’s day.  But even that isn’t large compared to a bank.  JP Morgan’s® $2.5 trillion dollar assets when compared to that single grain of sand would weigh nearly 624 pounds.  If I had to pick between lifting 624 pounds of steel or 624 pounds of butane, I’d choose the butane.  Why?  It’s a lighter fluid.

I imagine this toddler weighs about 28 pounds.  It’s a perfect competition size toddler, depending on the shape of its head, of course.  Sadly, I can’t throw one farther than about 35 feet.

The size and scale of international banks today is huge, and I’ll admit when I put together the weight comparison above, it was the first time that the vast scale of the international banks was even slightly comprehensible, though mind boggling – it takes me from a weight I don’t notice, to a weight that I’d have to use both arms to lift.  Okay, I’m lying.  Maybe if I put my back into it I could lift it with one arm.

Thankfully, my net worth actually weighs less than pocket lint.

In the 1984, a bank named Continental Illinois® was failing.  As the cratering price of crude oil hit, the bank experienced massive losses.  Fearing a bank collapse, depositors pulled their money, but of course the bank had loaned it out.  Continental Illinois™ was bailed out through a combination of cash infusions ($5.5 billion), emergency loans ($8 billion), and change the Federal Reserve® found in Paul Volker’s couch cushions.  In congressional hearings about the matter, a congressman noted that Continental Illinois© was “too big to fail.”  The phrase had been used before, but this time it stuck – a Google™ search for “too big to fail” brings up about 5 million pages, most of which are about Amy Schumer.

The reason that they bailed out Continental Illinois© wasn’t that they were good natured.  The reason that the Federal government bailed out Continental Illinois was that they were scared to death – they had no idea what would happen if they just let the bank fail.  Would it bring down the economy?  No one knew – and just like wondering exactly what’s in a hot dog, no one was willing to find out.  And don’t tell me what’s in a hot dog, I’m pretty sure I don’t want to know.

What were people worried about?

I asked my bank teller to check my balance, and he tried to push me over.  Nah, I’m kidding.  He threw a snake at me.  I should stop keeping my money at the river bank.

A bank failure to most people is nearly risk-free.  The FDIC® (Federal Deposit Insurance Corporation©) extends insurance to cover more money than the average family is worth.  But a small business or farm, even one that doesn’t have a multi-million dollar net worth, might have enough money moving through the account that a bank failure might trigger that small business to fail since its cash was . . . gone.

If that business had debts to other banks, it would then be in default, and cause a loss at the next bank.  If the next bank doesn’t fail, there are still problems.  The next bank will lend out money only to customers that it knows will pay it back – if it has sustained losses it won’t want to make loans that are risky.  A small town farm bank failure is bad and might devastate a community if it causes other businesses to fail.

When Continental Illinois™ started to fail, it was the seventh largest bank in the nation.  No one had any idea what its failure would do to the country, so it was not allowed to fail.  The government looked for someone to buy it, but they had no luck – like a Leftist spending his own money, a buyer for a massive bank that is failing is fairly difficult to find.

But let’s go back to JP Morgan®.  How did it get so big?  If you rewind the clock, the average size of a bank used to be pretty small, operations used to be limited to a single state, and there were no branches – each bank in each town was an independent entity.  Sure, one person might have owned more than one bank; even dozens of banks.  Each bank, however, had to stand on its own.

With that kind of small exposure in both size and location, banks limited the damage that they could do if they failed – over 9,000 banks failed during the Great Depression.  Sure, that was devastating, but I would argue that the failure of just one bank, JP Morgan®, would far exceed the damage that was caused by the failure of those 9,000 banks, each of which certainly weighed less than a toddler.

I was going to add transparent bikini graphics, but The Boy went off to college so you’ll have live with these. 

Is there an argument for large banks?  Paul Krugman thinks so.  And if Paul Krugman is for it, I’m probably against it.  If Paul Krugman said that Wilder, Wealthy and Wise™ was his favorite blog?  I would argue with him, even if it involved a knife fight, which would probably work out okay for me because he’s old and weak and I smell like hamburger.  Krugman’s argument is, more or less, that bigger banks are more efficient so we should regulate them properly and let them live.

My counter to Krugman’s drivel is that is that the banking regulators are not working for the Federal government, they are working for the banks.  Most banking regulators want to work for the big banks, because that’s where the money is.  Actually regulating the bank would doesn’t look good on your resume.  This isn’t my imagination:  I actually had this conversation with a banker who had been a regulator.  His conclusion was the only real way to get fired as a Federal banking regulator was to do your job.  Come in late?  Go to sleep at work?  Surf porn on the Federal computers?  All that’s fine.  But ask Wells Fargo® to follow the law?

I smell a firing.

Big banks create a risk to the very existence of our current economic system since they have the unique ability to take profits when things are going well, but if they screw up?  You and I are paying.  I rate this risk as not as bad a risk as the drunken sailors masquerading as politicians in Washington, but still a pretty big risk.

From the above, I think it’s obvious what the downside is to having larger banks, since they risk our economy as a whole, and that’s not even mentioning Modern Monetary Theory (The Worst Economic Idea Since Socialism, Explained Using Bikini Girl Graphs), or fiat currencies (Rome, Britain, and Money: Why You Can’t Find Fine China after the Apocalypse).  And, make no mistake – the failure rate for all businesses nears 100% over a long enough timeline.  Just ask Tyler Durden.

I Am Joe’s Inflamed Uvula.

What’s the downside of breaking banks into smaller units, and perhaps limiting their capitalization to what Jeff Bezos keeps in his “spare mistress” account?

• First, there’s more overhead. You need competent people to run the various independent branches, but what you get is the resiliency of an inefficient system – the risks that will cause all of the banks to fail are remote.  So, breaking apart banks would lead to more jobs for competent people.  Yes, that would lead to lower profits for the banks.  Yes, I’m a capitalist.  No, that’s not bad.
• Second, if they’re limited to geographic regions, the banks that are in regions that might become economically depressed would have less money to lend. That’s probably okay.  I’m pretty sure I don’t want money from my state going to those heathens in Rhode Island, so I’m okay keeping it nearby.  Besides, if there are good opportunities here?  Money will flow in.
• Third, smaller banks could That would make investors more likely to keep an eye on their investment.  And if bad things happened?  They’d be limited to failures that we could deal with, like forgetting to pay the cable bill.  Somebody nag me on Friday.
• Fourth, it would be harder to borrow a few billion dollars. Okay, this can be solved several other ways for the legitimate requests to borrow a billion dollars, like needing to buy a first edition .

Even with smaller banks, some of the conveniences like ATMs could still remain in business – that sort of networked information exists now, so it could exist in the future.

I brought up the example of Continental Illinois© bank.  The name wasn’t at all familiar to me, but I did look up what happened to them.  Continental Illinois® was sold to Bank of America™ in the 1990’s.  Bank of America© is the second largest bank in the country.

How to solve the problem of too big to fail?

Make the too big to fail banks even bigger.  Is that a problem?  Is dropping a 624 pound shot put on a sandcastle a problem?

Nah, it’ll be fine.