Academic

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Kyle du Preez
What is the best way to resolve the issue of Too big to fail banks?


What is the best way to resolve the issue of Too big to fail banks? First off,
what is Too big to fail? Too big to fail means a company or institution that if it where
to fail would simply destroy the economy surrounding it. So if a bank, insurance
company, automotive manufacturer, etc. where to fail, their going out of business
would be more detrimental to the overall economy and financial health of the country
than if the institution where propped up by the government until it could stabilize. In
recent years there has been a lot of debate on Too big to fail banks, and what needs
to be done in order to stop the banks from having the power, not only over the
economy, but over the government as well. You might be wondering, who cares, or
why does it matter to me, I am just a normal everyday person, not some Wall Street
stock broker. Well it does matter, think of the following saying: privatized profits, but
socialized losses (Quirk, 2008). When the too big to fail banks guess wrong on a market,
the American tax payers bail them out, and pay for the banks mistakes, but when the
banks get it right, they dont seem to share the profits with the tax payers. This article
will cover the different opinions on the best approach to resolve the issue from a legal
stand point, a financial stand point, and an economic stand point. The point of this
article is not to see who is right or who is wrong, but to see what solutions America has
to avoid a repeat of the 2008 crisis in the future, and to lessen the grip that big banks
have on economy and government.

William J. Quirk, a law professor at the University of South Carolina, wrote an

article titled Too Big to Fail and Too Risky To Exist. In this article Quirk goes into great
detail on Big Banks, and their role in the 2008 crisis. He points out that the banks where
being handsomely rewarded to take major risks, with the protection of the government
to bail them out when they got it wrong. As he put it privatized profits, but socialized
losses. Quirks listed the following as contributing factors in the too big to fail problem,
social acceptance of debt, and acceptance of corruption. Quirk used the analogy of the
character Meyer Wolfsheim from the book The Great Gatsby, who rigged the 1919
world series, because he simply saw the opportunity, and related it to what the banks
did in the 2008 crisis.
Quirks main idea on resolving the issue of big banks is to separate them into two
separate companies. One that handles the commercial loans, and accepting the deposits
from the public, and the other to be the investment bank that buys and sells stocks,
bonds, and other investment tools on the open market. With Quirk being an attorney
his focus was on the laws placed on banks after the crisis, specifically the Dodd-Frank
laws. He states The theory that more regulation will prevent a repeat of the crisis. This
seems unlikely: before the crisis, banking was the most regulated business in the
country. He goes on to say that the Dodd-Frank laws are more of a general guide than
actual laws, and explains how practically it is nearly impossible to monitor the things
being asked of these banks. Quirk believes the key to resolving the issue is to simplify
the banking industry, not make it more complex, and by separating the banks into two
separate entities it would simplify a lot of things. The laws would no longer have to

dictate that inter company departments would not be allowed to work together, and
with the separation there wouldnt even be any incentive for them to do so. Quirk
points out that this is highly unlikely to change since the banks currently spend insanely
large amounts of money lobbying in DC, so the politicians will not do what is needed,
but instead do as they have been asked by the banks.
James R. Barth wrote an article titled Just How Big is the Too Big to Fail
Problem? within his article he dissects the too Big to Fail banks, and analyzes them
from a financial stand point, just how big are these banks? and how exactly this all came
about? Barth talks about the history of Big Banks, and explains that this is nothing new.
He refers back to the first time banks went to the government for a bailout in the
1980s. Barth talks in great detail about the Dodd-Frank Act and its implications on the
banking industry. He talks about the increased regulations, and the new oversight that
will be put in place over the next few years to ensure a crisis like 2008 does not occur
again.
Barth did not propose a solution to the situation at hand, but supported the
direction that is currently being taken by the American government in creating new laws
and regulations (Dodd-Frank Act) for the banks to follow. Barth studied finance and he
worked on numerous presidential staffs economist teams, he has worked on the inside,
and understands what the grand scheme of things are from the lawmakers stand point.
However, Barth states, Our analysis points out that despite the recent regulatory
changes the future of Too Big To Fail remains unclear, but it is likely that it will be
different from the past. This perfectly sums up his views and opinions on the subject.

There are large amounts of statistics to support this, but as Barth said, the future is
unclear, however with the changes the American Government is making it will be
different from the past.
In the Article Too Big To Fail: Origins, Consequences, and Outlook Robert
Hetzel reviews the Too Big To Fail issue, and gives his predictions on how to resolve the
issue from an economists stand point. Hetzels analysis matches those of Quirks and
Barth spoken about earlier. The one area that Hetzel differs from the rest is that of his
outlook. He states that it will basically take an entire overhaul of our banking regulatory
system to fix the issue, and that the American banking system is not designed to limit
the growth of banks. He goes on to say that a perfect indicator of this, is that The
European Common Market is mimicking Americas banking system to promote bank
growth and expansion. This indicates that the American banking system is designed for
growth.
Hetzel has a background in economics and was instrumental in the development
of Market Monetarism, which is a form Macroeconomics that focuses on central
banks and their focus on income levels of a population rather than that of inflation and
other market factors. Hetzel doesnt propose a solution to the big bank issue, but
indicates where the system is too weak to combat the forces of too big to fail banks. He
believes that the American government is unable to monitor and regulate such large
and complex organizations. Hetzel gives examples on how the recent laws and
regulations that have been put in place will limit, or slow these banks, but he doesnt
have an answer on what will resolve the too big to fail banks. He does believe that

fundamentally the banking system is flawed, and that it will take an entire reworking of
the industry to avoid this sort of crisis in the future.
All three authors state that a change needs to happen. All three have different
approaches on how it should happen. Barth (Finance) states that more regulation will
resolve the issue, while Hetzel (Economist) believes while more regulation will help, it
will not resolve the issue, due to the fact that the fundamental building blocks of the
American system is geared more towards bank growth than anything else. Finally, Quirk
(Attorney) who believes that the government should step in and separate the banks into
two halves, one for the investing side, and the other for standard bank practices that we
as individuals use almost daily. While it is unclear if any of these three authors are
correct, only time will tell. There is a great deal to be learnt from them, and I think that
a combination of the all three recommendations may be the best approach. While Quirk
wants to split the banks into two, I think that additional regulation like Barth states that
will forces the banks into two sides, through making the sides essentially unable to
communicate with one another will be a good start to resolving the comingling issue.
While the government has tried something similar in the past, the government could
make it so the fines are so burdensome that it becomes not worth the risk, as well as
periodic inspections of the companies to ensure they are abiding by the new rules. I also
think that Hetzel has some valid points, however it is hard to justify limiting a companys
growth, someone would even say it is un-American. I am unsure if there is a way to limit
the growth of a company effectively while keeping everyone happy. While maybe
limiting the growth of a company is not a viable option, the idea of overhauling the bank

industry is something that is needed, and would work well with the ideas presented by
Quirk and Barth. The ideas from all three of them will require substantial work, and will
not be anything shy of an overhaul.
So to revisit the initial questions, what is the best way to resolve the too big to
fail issue? To be honest I dont think there is one. The lawmakers and bankers have their
fair share of work cut out for them on this situation. I do know that we have some of the
best minds in the world working on both sides of the battle, and who is to say which
side is right while or which side is wrong. What American really needs to learn from this
crisis is that humans will do what is best for them. Even if it means hurting others, the
system allowed for this, and America has taken steps to limit the chances of this
happening in the future. America will probably have another crisis one day, its the
nature of the beast that is Wall Street, and if America wants to keep reaping its benefits
of Wall street, they will need to pay from time to time. However, it is not fair to the
public to pay for those companies who made the mistake. Americans all have the
opportunity to make some money in Wall Street, and all have the opportunity to lose
some money, what is important is that those who play game are doing it with their
money, and not someone elses. I feel that is what has been forgotten, and why this
crisis got so much bad publicity from the world. If the banks had lost their money, I
wouldnt be writing this article and no one would really care, just like past crisis.

Work Cited
Barth, James R., Apanard (Penny) Prabha, and Phillip Swagel. "Just How Big Is the Too

Big to Fail Problem?" University of Pennsylvania. 27 Mar. 2012. Web. 17 Mar.

2016. <http://fic.wharton.upenn.edu/fic/papers/12/12-06.pdf>.

Hetzel, Robert L. "Too Big To Fail: Origins, Consequences, And Outlook." Economic

Review (00946893) 77.6 (1991): 3. Academic Search Premier. Web. 18 Mar. 2016.

"James Barth_Home Page." James Barth_Home Page. Harbet Auburn. Web. 18 Apr.

2016. <http://harbert.auburn.edu/~barthjr/>.

Quirk, William J. "Too Big To Fail And Too Risky To Exist: Four Years After The 2008

Financial Crisis, Banks Are Behaving More Recklessly Than Ever." American
Scholar 81.4 (2012): 31-43. Academic Search Premier. Web. 18 Mar. 2016.

"Staff Economists." Economists. Federal Reserve Bank of Richmond. Web. 18 Apr. 2016.

<https://www.richmondfed.org/research/economists/bios/hetzel_bio>.

"Too Big To Fail Definition | Investopedia." Investopedia. 2009. Web. 18 Apr. 2016.

<http://www.investopedia.com/terms/t/too-big-to-fail.asp>.

William J. Quirk, 80, USC Law Professor Who Created Longterm Friendships with

Students - ColaDaily.com." ColaDaily.com. Dunbar Funeral Home, 2014. Web. 18

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