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“They Are Too Big for their Britches”

They being the financial conglomerates.  Where I grew up if someone was “too big for their britches” they needed to be knocked down a couple of notches.  That is what needs to happen to the financial conglomerates - they need to be knocked down a couple of notches.  The financial sector should facilitate “intermediation”  meaning that it serve as a middle party to allocate money/capital from one party to another party and provide insurance.  That is it.  But the financial sector as a whole and financial conglomerates, in particularly, have become the driving force in our economy.  They provided the massive amounts of debt that fueled this financial-economic crisis we are in today.

The financial conglomerates and the financial sector as a whole is just too big.  One way to look at this issue is by examining the financial sectors output as a percentage of Gross Domestic Product (GDP).  Check this out:

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In 1980, the financial sector was 4.9% of GDP but by 2007 it was 7.5% of GDP.  What happened? In 1999, the Financial Services Modernization Act (AKA Gramm-Leach-Bliley Act) was passed.  This Act eliminated many of the restriction on commercial banks from operating in other segments of the financial sector such as investment banking and insurance.  It was the beginning of the financial conglomerates (in my not so humble opinion). 

But what did this growth of the financial sector and financial conglomerates give us?  A lot of debt.  Check this out:

Click on Image to Enlarge

This is the total debt service (principal and interest) payments that we make as compared to our disposable income.  Notice how the line takes off - that is a lot of debt and debt payments.  Thanks in part to these financial conglomerates.  I say in part because Fannie Mae and Freddie Mac had a hand in this increase in debt.  If you are still not convinced that these financial conglomerates are “too big for their britches” then look at the Top 10 Bank Holding Companies (as of 3/11/09)(BTW, Bank Holding Company is a legal term for financial conglomerate):

                                                                                                                                                                                     

Rank	Institution Name	Total Assets (In thousands)
1	Bank of America Corporation	$2,323,415,453
2	JP Morgan Chase & Co.	$2,079,188,000
3	Citigroup, Inc.	$1,822,578,000
4	Wells Fargo & Co.	$1,285,891,000
5	Goldman Sachs Group, Inc.	$925,987,000
6	Morgan Stanley	$626,023,000
7	HSBC North America Holdings, Inc.	$401,824,818
8	Taunus Corporation	$368,367,000
9	PNC Financial Group, Inc.	$286,472,490
10	U.S. Bancorp	$263,624,000

For those who have trouble keeping track of number places, like I do, the top spot, Bank of America, has $2.3 trillion in assets.  That is just too big.

What can we do about these “too big” financial conglomerates?  Well, we can stop doing business with them and find a local credit union or a healthy small community bank.  But don’t expect government regulators to do anything about it because it seems they are comfortable with having “too big” financial conglomerates.

To be continued.

 

 

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