The universe functions in a realm of grey, no matter that a set of immutable laws guide those very functions. For example, if you were to drop a feather from the Empire State Building, it might defy the law of gravity for some time before settling down to earth. And what about air, that ubiquitous combination of gases that simply floats above the earth, regardless of gravity’s dictate?
My point is this – laws define how we behave, but no law is absolute. Certain conditions warrant exceptions. It is the same with ideological principles. No principle is absolute; yet, there are those who believe the principle of free-market capitalism is absolute, and those same believers have railed against government intervention in the 2008-09 collapse of the banking system. “Let them fail,” is the cry. “Only the fittest should survive” is the edict. Well, putting Darwinian economics aside, the reality is that for the most part, this principle is in effect. Just ask all the small businesses that no longer exist because they went out of business in the last two years.
The bad news is that the big banks are not small businesses. In fact, the phrase, “too big to fail” is apropos and more dangerous than the reality of government intervention to stave off total economic collapse and subsequent depression. And here is the problem; we could not then and cannot now allow these institutions to collapse, and here is why.
The banking industry has become much more concentrated as it has grown in recent years. In 1995, the assets of the six largest banks were equivalent to 17 percent of G.D.P.; now they amount to 63 percent of G.D.P. Meanwhile, the share of all banking industry assets held by the top 10 banks rose to 58 percent last year, from 44 percent in 2000 and 24 percent in 1990.
Little has changed to correct this massive and, I must add, dangerous, imbalance. This portends future horrific problems, true, but going back to 2008, the very real and future consequences of capitalistic failure appeared when both Bear Stearns and Lehman Brothers did fail. Imagine, for a moment, had JP Morgan, B of A, Goldman Sachs, and the rest of that cabal failed. Look at the tsunami-like ripples the two failures caused, and the imagined picture is horrible indeed. Now, there is one more ingredient to this that no one seems to talk about anymore – the single largest bailout of all – AIG.
If we (taxpayers) had not bailed out AIG ($162 billion), the global ramifications are unimaginable. You see, there is a reason the bad guys want AIG under the radar. AIG was the “safety net” for these banking conglomerates. These big banks “insured” their derivative plays (think credit-default swaps and other such exotics) with AIG to the tune of some $1.7 trillion, and that is the reason we had to “save” AIG. Had AIG failed, the U.S. big banks quickly would have followed, along with all the other “too big to fail” banks around the globe. You see, much of AIG’s “bail-out” paid off the bets the global big banks foolishly made.
This is a complex matter, no doubt, and this is a synoptic treatment of the issue, but, make no mistake, had the government allowed these institutions to fail, most likely, I would not be writing this column today, and a good chance exists you would not be thinking about your next trade. So, remember, principles guide us, but when a principle crashes into a reality that threatens harm, it is time to let it go, at least until the crisis passes.
Trade in the day; invest in your life
