As Barack Obama and Mitt Romney battle for the presidency, neither is talking about the continuing too-big-to-fail status of our financial institutions. That makes about as much sense as two men fighting for the possession of a ticking bomb.
On May 11, we had a scary déjà vu moment. JPMorgan Chase, the United States' largest bank, announced it had lost $2 billion in a speculative bet by its London office. Since then, estimates of the loss have risen to as much as $9 billion.
People worried that JPMorgan Chase and other megabanks were again engaged in the reckless gambling that caused the global financial crisis of 2008 and the Great Recession. We cringed at the prospect of taxpayers once again bailing out banks that are so big and interconnected they would crash the economy if they went bankrupt. The story soon faded from the news, but the threat of another meltdown hasn't gone away.
According to the Fed's National Information Center, as of June 30, JPMorgan Chase had total assets of $2.3 trillion. The five biggest banks (JPM, Bank of America, Citigroup, Wells Fargo and Goldman Sachs) had combined assets of $8.65 trillion (equal to more than half the gross domestic product of the U.S.).
As Bloomberg's David Lynch reports, the top five banks are even bigger than they were at the time of the financial meltdown of 2007-08, and are "twice as large as they were a decade ago relative to the (size of the) economy." He quotes Gary Stern, former president of the Federal Reserve Bank of Minneapolis, as saying: "Market participants believe that nothing has changed, that too-big-to-fail is fully intact."
How can that be? Wasn't the Dodd-Frank financial reform legislation of 2010 supposed to handle this danger? In an Oct. 11 Bloomberg.com article, Simon Johnson, MIT professor and former chief economist of the International Monetary Fund, gave three reasons why Dodd-Frank can't do the job:
■ The resolution powers that the law gives to regulators to manage the "orderly liquidation" of troubled megabanks are purely domestic. Huge financial institutions typically have international operations, and "U.S. legislation can't specify how assets and liabilities in other countries will be treated; this requires an intergovernmental agreement of some kind." As yet, there is no such agreement, and none is in sight.
■ Such resolution powers would need to be used preemptively. Yet, based on their record during the past five years, it is very unlikely that federal officials would have the courage and independence to act preemptively.
■ The losses this action would impose on bank creditors would create fears in the financial community similar to the panic that arose when Lehman Brothers was allowed to fail.
Which is why, Johnson says, "the presumption in financial markets is that the largest financial institutions are too big to fail."
When Obama became president, he could have addressed this problem in a simple and obvious way: by breaking up the megabanks. However, he was too beholden to Wall Street financiers whose contributions were vital to his election.
When he appointed to his top financial team the likes of Larry Summers, Tim Geithner and Ben Bernanke, we knew not to expect serious reform. His presidency relied on the very "experts" whose ineptitude and biases had allowed the meltdown to happen, when they had the power and responsibility to do something.
Incredibly, Romney says he wants to kill the entire Dodd-Frank act. This would have the immediate effect of letting megabanks go back to the reckless behavior that exploded the economy. He has offered no specifics on what would replace it, only that it would be a "streamlined, modern regulatory framework."
To some extent we've become resigned to the "new normal" of diminished quality of life created by the disaster. But we should never forget its magnitude, as reflected in the numbers in the 2010 Pew Charitable Trusts Report:
"U.S. households lost on average nearly $5,800 in income due to reduced economic growth during the acute stage of the financial crisis from September 2008 through the end of 2009." Our country also lost "$3.4 trillion in real estate wealth from July 2008 to March 2009 according to the Federal Reserve. This is roughly $30,300 per U.S. household."
We shouldn't let the noise and distraction of the presidential and congressional horse races block our ears to an ominous sound.
The clock really is ticking.