Stopping the Next DepressionEnding Too Big to Fail

STOPPING THE NEXT DEPRESSION:Banks Are Still Too Big to Fail

• Prof. Anat Admati, Stanford University• Phil Angelides, Chair, Financial Crisis Inquiry Commission• Richard Eskow, Writer, Senior Fellow at Campaign for America’s Future (panel moderator)• Senator Jeff Merkley• Robert Kuttner, Writer, co-founder and co-editor, The American

Prospect, Distinguished Senior Fellow, Demos

Introduction

• The price we’ve paid (and are still paying) for Too Big to Fail bank behavior

We Haven’t Recovered From the Last Crisis

“The Long Depression”

• The U.S. lost 180 percent of a year's total output during the 1930s' Great Depression• Berkeley economist Brad DeLong: Total losses from the financial crisis of

2008 will equal 160 percent of a year's output• The “Long Depression”• Great Depression initially ended with the onset of World War II• The Long Depression ….. ?

“The Long Depression” is Deep

• Official unemployment rate is 7.7%; the official U6 rate (which includes the under-employed) is 15.6%. An alternate methodology which includes discouraged workers brings the figure up to 23%.• Nearly 50 million Americans lived below the poverty line as of the last

census. • Wealth inequality in the United States is higher than Egypt.

“The Long Depression” is Long

• We've had abnormally high unemployment for four years now, and the numbers are still dismal.• Poverty in the United States increased for the fourth year in a row in

2011 (the last year for which statistics are available), and now includes one out of every five American children.• Growing inequality stifles growth and points to long-term stagnation in

both wages and hiring.

Recessionary Cycles: We’re Almost Due

• Banks• Other lenders• AIG, other non-bank institutions• Traditional banking• ‘Financial innovation’• Shadow banking• Algorithmic trading• Dark pools

The Financial Sector

Growth of Financial Sector Before the 2008 Crisis

They Kept Right on Growing

Merger Mania

How big is “big”?

Very big.

But they don’t do much banking.

Concentration of High-Risk Financial Products

Source: Bank for International Settlements

Blowing Bubbles

How did they do it?

How did they do it?

Efficiency Plus

The Usual Suspects

Morning headline from bank newsletter:“How a World War Z Pandemic Would Disrupt the Banking Industry”

• How a Zombie Pandemic Would Disrupt the Banking Industry and Consumers• “With its close ties to the economy, the banking industry would be one of the areas most heavily affected by

a pandemic … Problems within the banking industry would also have the potential to cause the ost disruption to American’s everyday routines and quality of life.”

• According to a report from the International Money Fund (IMF), a lack of foresight could affect the banking industry’s ability to react to the consequences of such a virus. “Preparations by large complex financial institutions, key retail banks, and the authorities themselves will need to be robust,” the IMF report warns. “Failure in any of these institutions will have an impact on the global financial system in addition to the direct impact on their own operations.”

• Banks would likely be understaffed as many employees would be quarantined – either due to self-imposed or mandated reasons – making it difficult to access one’s money or obtain financial services.

• Debit and credit cards would lose their value as understaffing at banks could prevent the secure processing of payment.

• There would be a high demand for cash as it would likely be the only form of secure, easily transferable payment for necessary goods and services such as water, food, and shelter.

• Spending would likely be limited to necessities as the demand for hard currency and a lack of bank access would affect personal finances.

WORLD WAR

Z

WORLD WAR

Z

WORLD WAR

TBTF

WORLD WAR

TBTF

Money in Politics

WORLD WAR

TBTF

Dead Economic Ideas

WORLD WAR

TBTF

Media Bias and Ignorance

WORLD WAR

TBTF

Public Unaware ofThe Danger

WORLD WAR

TBTF

Money in Politics

WORLD WAR

TBTF

No Prosecutions

Evidence of Offenses Committed by Major Banks (Typically Settled Without Criminal Charges)

• Foreclosure fraud• Perjury• Filing of false documents• Tax evasion• Bribery (Jefferson County, Alabama)• Laundering drug money for Mexican cartels• Rate-fixing• Investor fraud …… etc.

“ … the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if you do prosecute, if you do bring a criminal charge, it will have a negative impact on the national economy, perhaps even the world economy.”-- Eric Holder

Barriers to Change

• Political power• Economics: professional myth and culture• Culture of Greed• Media ignorance and complicity• Lack of public knowledge

What steps can we take? What others barriers do we face?

Crisis is Their Business Model

Quotations from Chairman Jamie:

It’s not a surprise that we know we have crises every five or ten years. My daughter came home from school one day and said, ‘daddy, what’s a financial crisis?’ And without trying to be funny, I said, ‘it’s the type of thing that happens every five, ten, seven, years.’ And she said: ‘why is everybody so surprised?’ 2010

This bank is anti-fragile. We actually benefit from downturns. 2013

Jamie Dimon, CEOJPMorgan Chase