NO MORE TOO BIG TO FAIL OR PUT IN JAIL

No problem is so severe that our government can’t make it worse.

The subprime mortgage crisis plunged our economy into a deep recession, and nearly destroyed our financial system.  The federal government responded by:

*Doing absolutely nothing about the Federal National Mortgage Association  (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), the "government-sponsored entities" whose reckless policies and mammoth bankruptcies triggered the crisis.

*Bailing out the big investment banks whose reckless behavior worsened vastly the crisis brought on by Fannie Mae and Freddie Mac.

*Punishing community banks that had absolutely nothing to do with the crisis.

Government has done next to nothing to prevent the next financial crisis, much to make sure it will be worse.

This is partly because those who broke the law haven’t been prosecuted.  "As a general rule, the worse you behaved from 2000 to 2008, the better you’ve been treated," said Wall Street Journal columnist Brett Arends.  "And so the next crowd will do it again. Guaranteed."

But it’s mostly because the dangerous concentration of wealth in a handful of "too big to fail" banks has increased by 20 percent.  The ten largest banks now account for 65 percent of all banking industry assets.  The five largest account for half.  In 1984, the top five U.S. banks controlled only 9 percent of the total deposits in the banking sector.

Lots of taxpayer money has been expended to put us at greater risk.  The expenditures began with the $700 billion Troubled Asset Relief Program.  Congress approved TARP with the understanding the money would be used to buy up bad mortgages.  Treasury used the money instead to make loans directly to troubled banks.

The banks have repaid their loans.  Taxpayers would have made a little money from TARP were it not for the auto bailouts and a mortgage subsidy program President Barack Obama tacked onto it.

Though big banks benefited, smaller banks — and Americans as a whole — have not, said TARP’s inspector general.  Mismanagement by Obama Treasury Secretary Timothy Geithner turned TARP "into a program commonly viewed as little more than a giveaway to Wall Street executives," Neil Barofsky wrote in the New York Times last year.

Worse, "[TARP] has increased the potential need for future government bailouts by encouraging the ‘too big to fail’ financial institutions to become even bigger…therefore increasing their ultimate danger to the financial system," Mr. Barofsky told Congress.

The big banks have no incentive to curb reckless lending because they "reasonably assume that the government will rescue them again, if necessary," he said. "Indeed, credit rating agencies incorporate future government bailouts into their assessments of the largest banks, exaggerating market distortions that provide them with an unfair advantage over smaller institutions."

The big banks got another boost with the passage in 2010 of the 2,300- page Dodd-Frank financial reform law, which imposes 400 new regulations upon bankers.  It will take more than 24 million man-hours to comply with the new rules, estimated a House committee.  That’s a devastating burden to community banks, which don’t have large legal staffs.  Dodd-Frank will force 1,000 of them out of business by 2020, estimates the American Bankers Association.

Implementing the law requires an additional 2,850 federal employees, at a cost to taxpayers of $1.3 billion, the Government Accountability Office estimated.  But it does nothing to curb risky lending or investments, as the $2 billion trading loss JP Morgan Chase reported in May demonstrates.

The enormous concentration of wealth in a handful of banks is a product of crony capitalism, not of market forces.  The big banks can afford lobbyists and campaign contributions community banks cannot.

Too big to fail banks are too dangerous to permit.  "Our calculations indicate that the cost to the economy as a whole due to increased systemic risk is of an order of magnitude larger than the potential benefits due to any economies of scale when banks are allowed to be large," concluded a University of Minnesota study last year.

"Breaking up the biggest banks would allow markets to work better, by cutting down on crony capitalist rent-seeking by big money from big government," said James Pethokoukis of the American Enterprise Institute.

No dramatic trust-busting is required.  Just (1) repeal Dodd-Frank; (2) restrict federal deposit insurance to commercial banks only; (3) prosecute the sumbitches who committed crimes in the subprime mortgage crisis, starting with Barney Frank and Chris Dodd and (4) make it clear there will never ever be another bank bailout.  Then market forces will slim the obese banks down to a safe size.

Jack Kelly is a former Marine and Green Beret and a former deputy assistant secretary of the Air Force in the Reagan administration. He is national security writer for the Pittsburgh Post-Gazette.