Simon wrote a direct and balanced response to the appointment of Bill Daley. Here is the problem as he sees it, with a focus on systemic risk:
Today’s most dangerous government sponsored enterprises are the largest six bank holding companies: JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs, and Morgan Stanley. They are undoubtedly too big to fail – if they were on the brink of failure, they would be rescued by the government, in the sense that their creditors would be protected 100 percent. The market knows this and, as a result, these large institutions can borrow more cheaply than their smaller competitors. This lets them stay big and – amazingly – get bigger.
In the latest available data (Q3 of 2010), the big 6 had assets worth 64 percent of GDP. This is up from before the crisis – assets in the big six at the end of 2006 were only about 55 percent of GDP. And this is up massively from 1995, when these same banks (some of which had different names back then) were only 17 percent of GDP.
And what do we get as a society for having a massive “bet” on these banks?
No one can show significant social benefits from the increase in bank size, leverage, and overall riskiness over the past 15 years. The social costs of these banks – and their complete capture of the regulatory apparatus – are apparent in the worst recession and slowest recovery since the 1930s.
As regards the appointment itself, it raises this question:
This is not a left-right issue – again, look at the list of people who co-signed Professor Admati’s recent letter to the Financial Times. This is a question of technical competence. Do the people running the country – including both the executive branch and the legislature – understand economics and finance or not?
If the country’s most distinguished nuclear scientists told you, clearly and very publicly, that they now realize a leading reactor design is very dangerous, would you and your politicians stop to listen? Yet our political leadership brush aside concerns about the way big banks operate. Why?
And for the rest of us, here is the issue.
Most smart people in the nonfinancial world understand that the big banks have become profoundly damaging to the rest of the private sector.
If I slip into a fantasy for a moment, I can picture a patriot in Bill Daley’s position stepping up to the moment and saying that from his stint in the financial sector, he now has a full grasp on the dysfunction in the banking system. And that as a matter of national priority, the President intends to lead a continued and informed effort to both dismantle the current structure and build a constructive structure in its place. End of fantasy.