Sunday, December 07, 2008

Suddenly, small is big...

As the rolling bailout ball gathers momentum, it is hard not to notice one financial segment is doing OK. [And in case you haven't been paying attention, OK is the front of the pack these days.]

Small banks.

You know - those guys who take in deposits and pay interest and then loan it to guys like me who pay a little more interest. Dull, boring banking.  No securitized anything.  No swaps or merger deals. Just green eyeshade banking.

Some people have noticed and the idea of lots of small banks instead of a few big ones is gaining traction.
The concentration of power—political as well as economic—that resided in these few institutions has made it impossible so far for this crisis to be used as an evolutionary step in confronting the true economic issues before us. But imagine if instead of merging more and more banks together, we had broken them apart and forced them to compete in a genuine manner. Or, alternatively, imagine if we had never placed ourselves in a position in which so many institutions were too big to fail. The bailouts might have been unnecessary.

In that case, vast sums now being spent on rescue packages might have been available to increase the intellectual capabilities of the next generation, or to support basic research and development that could give us true competitive advantage, or to restructure our bloated health care sector, or to build the type of physical infrastructure we need to be competitive.

It is time we permitted the market to work: This means true competition with winners and losers; companies that disappear; shareholders and CEOs who can lose as well as win; and government investment in the long-range competitiveness of our nation, not in a failed business model of financial concentration and failed risk management that holds nobody accountable.  [ More - and don't look at the author's name]

Jeez - I told you not to look.

Anyhoo, other voices have come to a similar conclusion.
If we can identify such banks, why not try to make a rule preventing banks from becoming that big? As a tradeoff, banks that rested in the small-enough-to-fail category could be allowed to operate with much, much laxer oversight and regulation since everyone would understand that if they fail they’re going to sink. Presumably, there are some efficiency gains associated with the economies of scale involved in big financial institutions. But there would also be efficiency gains associated with relaxing the regulations on financial institutions. And the only reasonable way to seriously relax those regulations would be to commit to a no-bailouts scenario. But to do that, we need to make sure the banks aren’t too big to fail. So why not focus the regulatory effort on that — on making sure that institutions don’t get so big that they need bailing out? [More]
This gets even more interesting. At this point, I need to make my own prejudices clear: I favor small banks, for several reasons.
  • They are 5 minutes away, and a force for good in my community.
  • They've been berra, berra good to me. At least, my bank has. 
  • I can deal with lifelong friends.
  • They protect my identity.  The woman who processes checks, along with eveyone else in the bank, knows I don't (or shouldn't) write checks for cash in Las Vegas or Singapore.  I'll trade a little financial privacy for help protecting my small pile of money any day.
  • I like knowing my loan interest gets paid back out to senior citizens I know who deposit their SS checks and need the income.  My farm supports more than our two local families, in a sense.
 I think agriculture is in for some collateral damage (pun intended) as both large banks and the Farm Credit System struggle with the credit market meltdown.  Don't get me wrong - I think the FCS does a great job, and I also believe they will weather this storm, but their problem right now is while they used to command a premium in the money market for their implied government guarantee, suddenly every other piece of commercial paper has a FULL government guarantee.  And we're only starting.  Their very business model is under duress, regardless of how well they do their job.

Meanwhile small banks are failing, to be sure, and nobody is wailing to Congress for them. Just as battleships are compartmentalized into individual watertight spaces, I think lots more small financial institutions would not decrease our financial efficiency and would go a long way toward increasing our financial system security.

Meanwhile, reports of farmers meeting with their lenders are trickling in, and are not reassuring.

More anon.  But if you have not spoken with your lender about what the right answer is for 2009, do it tomorrow.


Anonymous said...

I think this is a great blog, and I would like to Post a Comment

There has been some recent news you might like to hear.Obama is making it better for us already! There has been an increase of money availability to everyone. Due to recession there is increased funding for all types of grants. Even lenders are bending over backwards to bail you out too. Regardless of statistics, there is people getting tons of cheap money for personal use, investments,start businesses, buy homes, pay off debt, and more. Bailout is for YOU

Ol James said...

With all the bailouts,(handouts) going on. I have to wonder...Why should investors take stock in the proposed rising height of a lead balloon??
The government can print all the money and paper it wants, but who is actually backing this?
Forgive an ignorant country boy Mr. John, but why invest in an uncertain and highly improbable thing?? (please help?)

Anonymous said...

There are more than banks that need to be included in your post, we could include everything from the "Big 3" to the Brazilian meat packer that wants to take over the US beef industry. We OK these aquisitions all in the name of efficiency. When will the government realize that being lax on its anti-trust laws is the root of many of these "too big to fail" problems? When is big, too big I really don't know, but I do know without some type of regulation this problem will continue. The car industry was allowed to consolidate to a point where now it can no longer compete or provide a product or care to provide a product that we want. I strongly believe there is someone out there that can design and build a vehicle that will be fuel efficient and be a car that will sell, but noone is going to go up against the automobile monopoly. This true for every industry and I think agriculture is headed in the same direction.

John Phipps said...


I can see your point, but the rest of the world does not. When you can sell bonds for .005%, you are the safest bet on the planet.

John Phipps said...


Much of ag is already consolidated - livestock, and to a lesser extent, dairy. I guess consolidation is bad when it's in your business.

As for grain farming, we are a long way from that level of consolidation which I picture as fewer than 1000 farming entities generating 90% of the output.

And I think that consolidation just slowed for a time.

Anonymous said...

So is now the time to stop the consolidation? If it gets to 1000 it won't stop there, we will then have the "Big 3" of agriculture that will need a bailout as soon as there is a hiccup in there business. Imagine what our rural areas would look like if we had twice as many families out here, not just people working for other people who can pull up and leave at the drop of a hat, but families with ownership in what they do and want there local communities to survive and prosper. I believe that would do more to stabilize this country more than any amount of bailout money would