Edward Yardeni of Yardeni Research in this week’s Barron’s:

“The problem with banks is that they tend to blow up on a regular basis. That’s because bankers are playing with other people’s money (OPM). They consistently abuse the privilege and shirk their fiduciary responsibilities. Whenever they get into trouble, government regulators scramble to bail them out first and then scramble to regulate them more strictly. Without fail, the bankers respond to tougher rules by using some of the OPM to hire financial engineers and political lobbyists to figure out ways around the new regulations.

In my opinion, banks are the Achilles’ heel of capitalism. They really do need to be regulated like utilities if their liabilities are either explicitly or implicitly guaranteed by the government, i.e., by taxpayers. Banks should be permitted to earn a very low utility-like stable return. Bankers should receive compensation in the middle of the pay scale for government employees, somewhere between the pay of a postal worker and the head of the FDIC. It should be the capital markets, hedge funds, and private-equity investors that provide credit to risky borrowers instead of the banks.”

‘Nuff said . . .

Category: Bailouts, Really, really bad calls, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “Banks Are The “Achilles’ Heel of Capitalism””

  1. PeterR says:

    Excellent thoughts from a real pro.


  2. DeDude says:

    And you would be hard pressed to find anybody who would disagree (except for the Wall Street banksters and the sociopathic dogs eating the scraps from the banksters table). The fact that we have not fixed this problem, say something about who is in charge of this country.

  3. MayorQuimby says:

    Yeah – I think that is a no-brainer comment but we don’t make that happen by voting Dem or Repub unfortunately.

  4. Chief Tomahawk says:

    Damn shiny silver toaster giveaways!

  5. blackjaquekerouac says:

    governments aren’t too helpful either. first they want all the money lent out. then they want more. this is stuff that goes back to the founding of the USA. the problem to me is not with the banks or the bankers per se but the whole “When Genius Prevailed” situation which somewhere “squared the circle” between the needs of the government to have credit extended to all at low to zero rates and the need for banks to have rock solid capital and strong profitability. i don’t think we need an irrational discussion of “what the banks and bankers should or not have.” clearly they are not nor ever will be utilities ala Europe since the economic value of their risk taking actually succeeding is so enormous (going on 4 decades now) i don’t think this is even a debatable subject anymore. the whole LIBOR thing as “bid rigging” (which of course it is…and thank God for that!) is case and point. You’d be insane to want to change that…although compensation based on the bid rigging certainly is an issue! What are needed are other “BOR’s”…which we do have…with China being the latest entrant. this keeps the very dangerous problem the the dollar hegemony collapsing “contained” at least in my view. I would agree there is much merit in having a discussion about lending and HOUSING…which is where the unholy alliance of Government and Bank actually did “blow up the world” the last time around…and looks ready to do so again should it get that chance. (I don’t think that bubble will re-inflate for decades.) anywho here’s what it looks like when a Banker goes to Washington to tell them “he has solution to both their problems”

  6. ConscienceofaConservative says:

    This is only true due to the lack of recourse we have against bankers and the huge subsidies we throw at them. If we went back to separating the investment banking and commercial banking function, had double liability equity and/or required banks to obtain subordinate financing we wold simultaneously tame the banks risk taking habits and reduce the need for future bail-outs. This is the result of bankers playing with other people’s money at not their own. Solve this problem and the need for regulation is greatly reduced.

  7. rktbrkr says:

    As was recently noted these explicit and implicit government guarantees to the largest banks are worth many hundreds billions to these banks. Meanwhile the Fed bucks up the biggest banks while small and medium size banks are at a huge disadvantage competing with the pampered behemoths.

    It’s no wonder these heavily subsidized, corrupt monsters dominate banking controlling 3/4 of US banking activity.

  8. ElSid says:


    Yeah, and if anyone comes out against them, it’s as if they are communist. Capitalism is like a religion now. That’s how they get away with robbing their own companies and shareholders blind. Actually start getting some traction with the above opinion and you’ll have some right-wing Senator, who’s in the banks’ pocket, up on TV grandstanding about how boot-strap guys like Jamie Dimon are what made this country great.

    Because you know, Lloyd Blankfein started out as a kid, pounding railroad spikes for the Bronx-Massachusetts-Manhattan Line.

    Note that the “utilities” and “government employees” references are Taleb’s idea.

  9. Union Agitator says:

    If there is any way I can help make this happen, please tell me.

  10. Tarkus says:

    “if their liabilities are either explicitly or implicitly guaranteed by the government,”

    Backed by the government??

    But…that would make all those bankers at Too Big To Fail Banks…Socialists….

  11. Haigh says:

    “It should be the capital markets, hedge funds, and private-equity investors that provide credit to risky borrowers instead of the banks.”

    And sovereigns should not be excluded from the list of risky borrowers. Thousands of years of history have shown few soverigns can be trusted with financial responsibilities.

  12. [...] How dare you compare 1% bankers to postal workers! Posted on July 29, 2012 by thecrosspollinator From here: [...]

  13. NoKidding says:

    The solution proposed here directly conflicts with the Einstein quote-of-the-day.

    The simple solution is to trust somebody (government or whomever) and give them all of the power. Not worth a dime. The complexity is that you can’t trust anyone, including the government. The simplicity on the other side of complexity is to empower everybody (government or whomever) but to limit the scope of their power by putting them in competing roles because you know they are not trustworthy.

    Thomas Paine and Thomas Jefferson understood what the author appears not to.

  14. rl2604 says:

    I agree with the notion that commercial banks should be regulated similar to utilities since I see some similarities between the leverage (high fixed costs amortized over time) necessary to run an efficient utility and the leverage (high financial leverage with risk constraints) needed to run a well managed bank.

    However, i disagree with the statement below:

    “It should be the capital markets, hedge funds, and private-equity investors that provide credit to risky borrowers instead of the banks.”

    This is an absurd statement as it would be nearly impossible for a greenfield company or high risk borrower (based on history of default) to get a loan. The capital markets do not lend to individuals on a one-off basis and they have minimum thresholds in securitized loan amounts to compensate for the transaction costs involved in the process. The bank is the only efficient method because they do customized due diligence for each loan they give to business entities.

    The best solution is to go back to how things were run in the 70s to 80s, spin out investment banks into private partnerships where there is unlimited liability for the general holders and limited for the outside private investors (this liability structure will generate strong risk controls for the institution) and regulate with strong capital controls on banks.

  15. Robert M says:

    Would someone please tell President Obama? With Geithner and Biden covering each hear he is having a hard time listening to reason.

  16. [...] Banks Are The “Achilles’ Heel of Capitalism” Big Picture. They should be regulated like public utilities. [...]

  17. [...] Ed Yardeni: Banks are the Achilles heel of capitalism, tend to blow up often.  (TBP) [...]

  18. JJ Butler says:

    Perhaps investment banks need to act like law firms: as partnerships with unlimited liability. Incentive and risk matter. At Swiss banks the directors and the board are personally liable if a bank goes bankrupt. Think give-a-crap factor. Leave the corporatist model not for more intervention, but less..

  19. VRWC says:

    Great idea….

    But who gets to define “risky borrowers”?

  20. DiggidyDan says:

    You can’t expect somebody to make a middling average government salary for doing “God’s Work.”

    That’s blasphemous. . .if this happens, then “God’s Work” shall remain undone, and then we all are damned!

  21. Brent_in_Aurora says:

    The banks will be bypassed by social lending. The market needs loans and people wish to invest at better returns than the banks provide (whether those rates are artificially lowered by the Fed action or not is irrelevant). Look for the Bank of Apple and its smaller brethren, the Banks of Facebook, Dwolla and Google.

  22. [...] Should banks be regulated by the State, like utilities? These guys think so. [...]