Is Citigroup "too big to fail"?

[drkitten]

I can understand your example of a supplier to the government deemed "too big to fail". But, as far as I know, Citi is not a government supplier. I don't think is that relevant in the financial sector anymore. Measured in total market cap, is not even the largest financial institution. So, why Citi? I'm not ready to buy into conspiracy theories yet...

Market cap isn't a particularly good measure; what's important is total exposure.

Think of it this way. Suppose I borrow a billion dollars from you -- for whatever reason and then tell you I will declare bankruptcy next month. The market value of your IOU is probably close to zero -- you couldn't sell it to any sensible person for a Hershey bar.

But if you had used that IOU as security for another loan or otherwise used it, there's probably more than a billion dollars of nominal value "out there" that is underwritten by that same IOU that isn't worth (market cap) a candy bar.

And what you need is some sort of additional funds to unwind your obligations that you took on when you thought that I still intended to pay the note off.

 

[oggiesnr]

The phrase "too big to fail" is a red herring that is only meaningful in the context of the instability that the fiat money/fractional reserve banking system introduces to the system.

If Citibank collapses then it will devastate all of its counterparties and have a negative systemic effect, but only because of the nature of the system. If we had sound money, the rationale that Citi is "too big to fail" would no longer apply. It's for this reason that fiat money and fractional banking are incompatible with a free society, and totally compatible with a fascist society dependent upon monopolistic banks and corporations, and a massive government.

The depressions of the 1870's to 1890's and that of the 1930's occurred during an era of the gold standard (as did earlier ones in history). The experience of outflows of gold from Europe in the 1920's did not prove any more stable than the FIAT currency of today. Neither did the fact that those outflows went to the USA prevent the Great Depression.

The value of all the gold that was ever mined is just over half the value of currency circulating in the USA, let alone the rest of the world. There is no way back from the Waters of Lethe.

In the case of Citibank et al, I'm not sure whether it's a case of too big or whether it's a case of too important to fail. For example, could Intel be allowed to fail? What would be the knock on effects?

Steve

 

[superfreddy]

The depressions of the 1870's to 1890's and that of the 1930's occurred during an era of the gold standard (as did earlier ones in history). The experience of outflows of gold from Europe in the 1920's did not prove any more stable than the FIAT currency of today. Neither did the fact that those outflows went to the USA prevent the Great Depression.

The value of all the gold that was ever mined is just over half the value of currency circulating in the USA, let alone the rest of the world. There is no way back from the Waters of Lethe.

In the case of Citibank et al, I'm not sure whether it's a case of too big or whether it's a case of too important to fail. For example, could Intel be allowed to fail? What would be the knock on effects?

Steve

Now, here's an interest point, "too important to fail". Let's see if we can explore this a little further. How would you determine importance. Would it be overall value to society?

 

[geni]

Wouldn't the market adjust to the fail in the long run?

Probably not since the collapse would take the market as we know it with it. Would the market rebuilt yes but at best you would be looking at over a decade and you could be looking at over a generation.

I've seen your explanation before but it still seems like especulation. Again, how big is "too big" in the financial sector?

Broadly speaking when the failure will result in the collapse of all the other major finacial institutions in a major world economy.

 

[The_Animus]

I don't think you understand that "the economy would take a hit" really entails.

The problem is that "credit" is not just used to spend money you don't have (although that's certainly one of the causes of the current crisis). It's also used to spend money that you DO have, but don't want to be inconvenienced by carrying around. As a simple example, I can't remember the last time I used a traveler's check. My ATM card, which is also a VISA card, works almost everywhere and in every currency; I can travel around the entire world and buy things for which I already have the money in my bank account.

If the VISA company suddenly collapsed, I wouldn't be able to do that. But I also wouldn't be able to use traveler's checks, because almost no one issues them any more, and almost no one accepts them any more. (The few places that do are generally banks, which would have collapsed along with the VISA company). Furthermore, I'd have a much more difficult time because the currency conversions aren't automatic -- if I had checks in dollars, I couldn't convert them to euros without going to a bank, and the bank relies on the existence of credit to do the currency exchange.

It makes no sense, for example, to eliminate the entire hospitality industry because we don't want to prop up the banking industry. But that would happen if the financial system collapsed, precisely because innkeepers would no longer be able to accept payment in any form other than cash -- and there's nowhere near enough cash in circulation to make the industry viable.

Yes, in the long run, "there will once again be lemon-soaked paper napkins." But the transition would be ugly, and go far beyond the "mere" billions of TARP funding.

It most certainly would be ugly. Someone has to have money as not everyone can be in debt. In fact many someone's must have very large amounts of money. If Visa goes under, its true that I may not be able to use my check card anymore, that is until I can switch to a new holder of my money. Someone must be willing to do this as there would be a market for it and profit to be made.

In all honestly I would need much more time to learn exactly how everything works, but from what I do know it seems to me that our entire system is flawed and royally screwed up. I think that sooner or later we won't be able to keep patching this leaky raft and there are going to be a lot of very angry people once they realize what's been going on with their money.

 

[geni]

It's a term made up by greedy executives who don't want to be regulated.

No. It actualy comes from a french guy who was worried about the idea that companies could become so big that they would be a threat to democracy. The idea being that you identify companies that are to big to fail and take action to break them into smaller parts.

There's no such thing as a company that's too big to fail.

There have been quite a few. Railway companies would once have qualified. Lose them and lose your ability to move goods around your country.

 

[drkitten]

It most certainly would be ugly. Someone has to have money as not everyone can be in debt.

That's not true.

It's fairly easy for everyone to be in debt, especially in a falling economy. (In fact, "everyone is in debt" is a pretty good definition of a falling economy.) If I buy something without paying cash for it, then I'm "in debt" for the balance. And if you then turn around and leverage the money you are owed by me (for that purchase) to buy stuff from me, then we're both "in debt" to each other.

 

[drkitten]

I can understand your example of a supplier to the government deemed "too big to fail". But, as far as I know, Citi is not a government supplier. I don't think is that relevant in the financial sector anymore. Measured in total market cap, is not even the largest financial institution. So, why Citi? I'm not ready to buy into conspiracy theories yet...

Market cap isn't a particularly good measure; what's important is total exposure.

Think of it this way. Suppose I borrow a billion dollars from you -- for whatever reason and then tell you I will declare bankruptcy next month. The market value of your IOU is probably close to zero -- you couldn't sell it to any sensible person for a Hershey bar.

But if you had used that IOU as security for another loan or otherwise used it, there's probably more than a billion dollars of nominal value "out there" that is underwritten by that same IOU that isn't worth (market cap) a candy bar.

And what you need is some sort of additional funds to unwind your obligations that you took on when you thought that I still intended to pay the note off.

 

[The_Animus]

That's not true.

It's fairly easy for everyone to be in debt, especially in a falling economy. (In fact, "everyone is in debt" is a pretty good definition of a falling economy.) If I buy something without paying cash for it, then I'm "in debt" for the balance. And if you then turn around and leverage the money you are owed by me (for that purchase) to buy stuff from me, then we're both "in debt" to each other.

So are you saying that every person and every institution in the world is in debt? Or are there indeed people/institutions that have large amounts of money?


The situation you describe doesn't make sense to me. If it is not bought with your own money it is still being bought with someone's money. So let's say that you borrow $100 from a bank whether literally in cash or electronic funds. You pay me that $100 for some item. I turn around and pay you $50 for something of yours. This leaves you with $50, me with $50, and you owing the bank $100. And seeing as you have $50, if you paid it back you owe the bank $50 and I have made $50.

It should not matter whether it is done in cash or electronic figures as in both instances neither has any real value and is only a placeholder as a medium of exchange. If this is not how it works then it seems to me there is a problem with the way our system works. If the bank is loaning out money it doesn't have that should be be very illegal as it creates all sorts of complications.

A financial institution is a business like every other business. There are risks involved in operation and so whoever runs the business needs to make good decisions. Lenders are in the business of extending credit to people in exchange for being paid back more than they lend. The risk involved is that the person may not pay them back and as such it is up to the lenders to ensure that they make smart decisions with who they lend to in order to minimize risk. If they make a bad choice then it sucks to be them just as it does any other business that makes a bad choice and fails.

Instead when our financial institutions made poor choices, we gave them a pat on the back, said it'll be okay and bailed them out with other peoples money (taxpayers).

 

[corplinx]

"Too big to fail" is of course debatable as a term. The current bailout supporting crowd Bush/Obama/Bernake/Geitner believe that letting Lehman Brothers fail was a mistake. They think that Lehman Brothers collapsing was not a huge financial concern in its own silo, but the ripples of that failure caused too much economic damage that could have easily been avoided. Bank runs, liquidity drying up futher, etc, etc.

Citibank is under heavy, heavy regulation currently. It is now too big to fail because the government would then have failed.

 

[Tippit]

The depressions of the 1870's to 1890's and that of the 1930's occurred during an era of the gold standard (as did earlier ones in history). The experience of outflows of gold from Europe in the 1920's did not prove any more stable than the FIAT currency of today. Neither did the fact that those outflows went to the USA prevent the Great Depression.

Number one, I'm not suggesting we need to revisit the gold standard, we need monetary reform. Gold is just one option. Number two, fiat money or sound money is independent of whether or not you have a fractional reserve system. The depressions you're referring two occured under wildcat banking, which was hardly a stable regime. Blaming commodity money for the instability of a fractional reserve system is a red herring.

The value of all the gold that was ever mined is just over half the value of currency circulating in the USA, let alone the rest of the world. There is no way back from the Waters of Lethe.

Which is evidence of how much the fiat money system has been abused. The current value of gold is irrelevant in the sense that it can and will be revalued, as necessary.

In the case of Citibank et al, I'm not sure whether it's a case of too big or whether it's a case of too important to fail. For example, could Intel be allowed to fail? What would be the knock on effects?

Steve

If it can't survive in the marketplace, it should be allowed to fail, so that more innovative, efficient, and competitive players can take its place.

 

[TriangleMan]

The current bailout supporting crowd Bush/Obama/Bernake/Geitner believe that letting Lehman Brothers fail was a mistake. They think that Lehman Brothers collapsing was not a huge financial concern in its own silo, but the ripples of that failure caused too much economic damage that could have easily been avoided.

I've spoken to a couple of US federal banking regulators and one NY banking regulator and they were also of the view that letting Lehmans fail was a mistake. The Govt underestimated the impact it would cause.

 

[oggiesnr]

Nagging at the back of my mind is a book (fiction) I once read based around a plot to buy up all the gold possible with counterfeit money. It all turned out to be a big plot in that once the gold was out of circulation (in the vaults of the USA) an international currency was then launched. I'll try and track it down, fun read but totally in the land of woo.

Steve

 

[corplinx]

I've spoken to a couple of US federal banking regulators and one NY banking regulator and they were also of the view that letting Lehmans fail was a mistake. The Govt underestimated the impact it would cause.

That's the rub isn't it? I don't think anyone wants to bail out firms that failed business 101 and overleveraged so much on one security that it took them out.

On the other hand, if you let them fail a bank run ensues and WaMu/Wachovia/etc have to be shut down by the FDIC and put under the control of other banks.

I'm not sure what the right solution is. To say it is a "free market" solution to simply let them fail seems like a flat earth view of the impact of letting the failure happen. That isn't a free market solution at all if it takes 4 other business for no other reason than human irrationality.

 

[blutoski]

The depressions of the 1870's to 1890's and that of the 1930's occurred during an era of the gold standard (as did earlier ones in history). The experience of outflows of gold from Europe in the 1920's did not prove any more stable than the FIAT currency of today. Neither did the fact that those outflows went to the USA prevent the Great Depression.

I'd actually like to get Tippit's thoughts about the historical evidence that the problems he associates with fiat money are common in many other monetary approaches.

I mentioned the inflation/deflation, exchange, and commodity crises in antiquity (my expertiese is Roman metal-currency economic woes such as the silver hyperinflation of circa 70BC, but there are plenty of recent examples) and I've never seen him respond.

The value of all the gold that was ever mined is just over half the value of currency circulating in the USA, let alone the rest of the world. There is no way back from the Waters of Lethe.

I'll wager that a metal economy would also undergo tremendous inflationary pressure pretty much immediately, as hoarding and mining interplay. Gold is a commodity and production input, as well as potentially currency.

In the case of Citibank et al, I'm not sure whether it's a case of too big or whether it's a case of too important to fail. For example, could Intel be allowed to fail? What would be the knock on effects?

I don't have enough information about Citibank, but I always wondered if Lehman Bros was a mistake.

 

[69dodge]

The problem is that "credit" is not just used to spend money you don't have (although that's certainly one of the causes of the current crisis). It's also used to spend money that you DO have, but don't want to be inconvenienced by carrying around. As a simple example, I can't remember the last time I used a traveler's check. My ATM card, which is also a VISA card, works almost everywhere and in every currency; I can travel around the entire world and buy things for which I already have the money in my bank account.

[...]

It makes no sense, for example, to eliminate the entire hospitality industry because we don't want to prop up the banking industry. But that would happen if the financial system collapsed, precisely because innkeepers would no longer be able to accept payment in any form other than cash -- and there's nowhere near enough cash in circulation to make the industry viable.

Aren't these two paragraphs contradictory?

If there's not enough cash in circulation, doesn't that mean that much of the money in people's bank accounts is not really money that they "have", but money that they borrowed? So that when they spend it, they are in fact spending money that they don't have?

 

[Tippit]

I'd actually like to get Tippit's thoughts about the historical evidence that the problems he associates with fiat money are common in many other monetary approaches.

I mentioned the inflation/deflation, exchange, and commodity crises in antiquity (my expertiese is Roman metal-currency economic woes such as the silver hyperinflation of circa 70BC, but there are plenty of recent examples) and I've never seen him respond.

That depends specifically what regime you're talking about. The Byzantine empire had perhaps the soundest money of any historical regime, and the penalties for coin-clipping were exceedingly harsh. Their currency and their empire lasted for nearly a thousand years.

I'll wager that a metal economy would also undergo tremendous inflationary pressure pretty much immediately, as hoarding and mining interplay. Gold is a commodity and production input, as well as potentially currency.

Do you really think the under-capitalized mining sector can compete with a Federal Reserve System that can monetize hundreds of billions, even trillions of dollars worth of debt with a keystroke? The natural rate of gold inflation historically has been about 3%, which should at least give some comfort to the deflation-mongers who are afraid of naturally falling prices in a sound-money regime.

I don't have enough information about Citibank, but I always wondered if Lehman Bros was a mistake.

Lehman Brothers was a mistake, in the context of an unfair, unjust, and unstable system, sure. But with all of these bailouts, why should we maintain any pretense that we live in a capitalist society anymore? It's patently obvious the government exists to extract wealth from taxpayers and currency holders, and transfer it to elite bankers.

 

[geni]

I'm not sure what the right solution is. To say it is a "free market" solution to simply let them fail seems like a flat earth view of the impact of letting the failure happen. That isn't a free market solution at all if it takes 4 other business for no other reason than human irrationality.

I would argue that the only aproach is the "don't allow this to happen" one. Once you accept that companies can become to big to fail your first objective is to prevent any company from doing so (by breaking them up into smaller bits say). If that proves imposible you throw in fairly heavy regulation and have a plan on file to nationalise them that gives the shareholders nothing.

This of course doesn't work so well with multinationals.

 

[blutoski]

That depends specifically what regime you're talking about.

No, the opposite: I'm talking about not cherry-picking. My point was that metal-currency regimes have been plagued with exactly the types of concerns you accuse fiat money of causing, which means you're probably wrong to say that replacing fiat money with other approaches will mitigate them.

The Byzantine empire had perhaps the soundest money of any historical regime, and the penalties for coin-clipping were exceedingly harsh. Their currency and their empire lasted for nearly a thousand years.

It's unclear what you mean. The currency's value is measured against what it can buy - land, food, &c. Interest rates were related to the availability of lenders, and would be a proxy for cash shortages. The Byzantines complained chronically about bouts of hyperinflation / hyperdeflation and commodity price fluctuation, real estate price fluctuation, commodity shortages, and usurous interest rates during cash shortages. They also had occasional bouts of coinage speculation, as the state would issue new coins with lower mass as a way to generate more money in the economy despite there being no increase in metal. ie: the government legalized their own version of clipping and a version of inflation with metal currency - thus, Gresham's Law.

Over and above this, there were other currency speculations, caused by contact with nations that used gold/silver in different ratios. Metal/metal exchange rates are arbitrary and as expected they didn't match up across borders, so arbitrage was possible during these periods. "Beware the money changers."

Do you really think the under-capitalized mining sector can compete with a Federal Reserve System that can monetize hundreds of billions, even trillions of dollars worth of debt with a keystroke? The natural rate of gold inflation historically has been about 3%, which should at least give some comfort to the deflation-mongers who are afraid of naturally falling prices in a sound-money regime.

I have no idea what that means: "the natural rate of gold inflation" - compared to the US dollar, you mean? How do you measure that going back 5,000 years? Why would there be a 'natural rate of gold inflation' at all?

 

[blutoski]

I would argue that the only aproach is the "don't allow this to happen" one. Once you accept that companies can become to big to fail your first objective is to prevent any company from doing so (by breaking them up into smaller bits say). If that proves imposible you throw in fairly heavy regulation and have a plan on file to nationalise them that gives the shareholders nothing.

This of course doesn't work so well with multinationals.

I think this was part of the rationale for the AT&T breakup in the '80s - too big to fail is too big to exist.

The problem is that a totally unregulated market is not interested in competition - they will M&A themselves into a monopoly, because that's the best return on shareowner investment.

As a consequence, the debate is about what kind of regulation must be applied to foster a balance between competition and economies of scale.