ALBERT HERTER

‘ACKERMAN VS. HOENIG: TAKE IT TO THE WTO,’ by Simon Johnson at baselinescenario .com.

In Uncategorized on November 4, 2009 at 12:44

 

Ackermann vs. Hoenig: Take It To The WTO

Posted: 03 Nov 2009 05:31 AM PST

 

Josef Ackermann, chief executive of Deutsche Bank and chairman of the Institute of International Finance (an influential group, reflecting the interests of global finance in Washington) is opposed to breaking up big banks.  According to the FT, he said,

 

“The idea that we could run modern, sophisticated, prosperous economies with a population of mid-sized savings banks is totally misguided.”

 

This is clever rhetoric – aiming to portray proponents of reform as populists with no notion of how a modern economy operates.  But the problem is that some leading voices for breaking up banks come from people who are far from being populists, such as the UK authorities (in the news today) and the US’s Thomas Hoenig.

 

Hoenig is an experienced regulator, who has dealt with many bank failures.  He is also currently President of the Kansas City Fed and an articulate voice regarding how banks became so big, why that leads to macroeconomic problems, and how consumers get trampled (answer: credit cards, issued by big banks; p.6).  He supports a resolution authority that would help deal with some situations, but also says (p.9):

 

“To those who say that some firms are too big to fail, I wholeheartedly agree that some are too big.  However, these firms can be unwound in a manner that does not cause irreparable harm to our economy and financial system but actually strengthens it for the long run.”

 

Mr. Hoenig is, if anything, a little too polite.  There is no evidence that huge banks, at their current scale, provide any social benefit.  When these same banks were much smaller, in dollar terms and as a percent of the economy, the global economy functioned no worse than today.

 

Mr. Ackermann and his colleagues are pursuing a purely self-serving line.  Reasonable centrist opinion is turning against them.  Either the big banks need to shrink voluntarily or they will potentially face consequences that they cannot control.

 

Building on ideas from the Kansas City Fed, the Bank of England, the UK Financial Services Authority, and the European Commission, the consensus is moving towards the view that state-supported banking (i.e., operating through implicit guarantees on Too Big To Fail banks) constitutes an unfair form of protectionism.  Financial services in this guise do not currently fall within the remit of the World Trade Organization, but it would be a simple matter to extend its mandate in this direction.

 

In any reasonable judicial-type process, involving relatively transparent weighing of the evidence, Mr. Ackermann would be most unlikely to prevail.

 

By Simon Johnson

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: