Time for surgery, Dr Obama

The banks have been pulled back from the brink. They are now strong and ambulatory. It is time for the surgery that the credit attack revealed was necessary.

Time to cut off the obesity, time to slim them down to a healthy, competitive size. Time to make sure no bank or other financial institution is ever again too big to fail.

Nobel prize winner in economics, Joseph Stiglitz, has joined Stanley Fischer in berating Obama for avoiding the surgery, content to remain wedded to permanent government subsidy for the banks. Content to provide constant care.

This is not middle-class welfare, it is flying first class, private jet even, on the government's credit card and laughing all the way back to their banks. It is the one public option we can't afford.

Stiglitz Says Bank Problems Bigger Than Pre-Lehman

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview yesterday in Paris. “The problems are worse than they were in 2007 before the crisis.”

A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.

While Obama wants to name some banks as “systemically important” and subject them to stricter oversight, his plan wouldn’t force them to shrink or simplify their structure.

“It’s an outrage,” especially “in the U.S. where we poured so much money into the banks,” Stiglitz said. “The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: Will they do as much as required?”

The Federal Reserve faces a “quandary” in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government, he said.

“The question then is who is going to finance the U.S. government,” Stiglitz said.

Stiglitz is too pessimistic and the banking system will probably continue to strengthen, said Jim O’Neill, chief economist at Goldman Sachs Group Inc. in London. “I’m not sure why he’s saying it,” O’Neill told Bloomberg Television today. “The banks were close to near death. We’ve been to hell and back, so to speak, and we’re on the road to recovery.”

PS: From Obama's speech today:

... some firms that posed a “systemic risk” were not regulated as strongly as others,... As a result, the failure of one firm threatened the viability of many others.

That’s why we’ll create clear accountability and responsibility for regulating large financial firms that pose a systemic risk.

we’ve also proposed creating what’s called “resolution authority” in the event that such a failure happens and poses a threat to the stability of the financial system. This is intended to put an end to the idea that some firms are “too big to fail.” For a market to function, those who invest and lend in that market must believe that their money is actually at risk. And the system as a whole isn’t safe until it is safe from the failure of any individual institution.

The only resolution authority we currently have that would prevent a financial meltdown involved tapping the Federal Reserve or the federal treasury. With so much at stake, we should not be forced to choose between allowing a company to fall into a rapid and chaotic dissolution that threatens the economy and innocent people, or forcing taxpayers to foot the bill. Our plan would put the cost of a firm’s failure on those who own its stock and loaned it money.

PPS: Further reading

The following top economists and financial experts believe that the economy cannot recover unless the big, insolvent banks are broken up in an orderly fashion...

Actually, the Washington's blog has been running a series of such posts since that last one, including this one explaining why banks can be broken up. Velly intelesting.