Are financial institutions too big?
Discussion
Watching the news this evening about AIG, and you have to ask the question - are our financial institutions too big? (Or were too big). Seems to me that part of the problem is that they've all got just a little too big and when you have a problem its a huge problem.
What would be wrong for instance limiting a bank to 1,000 branches? Limiting a mortgage book to £100bn of lending? Limiting an insurance company like AIG to exposure of £100bn? Employees and contractor to 10,000 people? Even limiting the business that a larger company can do in the country if its foreign owned and larger than the limits?
And so forth.
What would be wrong for instance limiting a bank to 1,000 branches? Limiting a mortgage book to £100bn of lending? Limiting an insurance company like AIG to exposure of £100bn? Employees and contractor to 10,000 people? Even limiting the business that a larger company can do in the country if its foreign owned and larger than the limits?
And so forth.
No, next.
Vino Interruptus, so -
With larger size comes economies of sale, up to a point, but more importantly the financial clout to get into new markets and expand. The wealth of experience within a large company (should be) well utilized and management the best that can be afforded. While it is true that the mistakes that then are made are larger - ABN Amro - it also means the successes are also bigger. Don't forget that we (most developed countries) have had an unprecedented period of growth, partly fueled by cheap borrowing. The question comes down to, would you give up that huge growth for much smaller returns but more steady long term? Lets say you bought your house 10 years ago, and sold it tomorrow for about the same as you paid for it (after inflation) would this be ok with you or would you prefer an asset that could go up in price but might go down?
Smaller companies, as you set-out wouldn't be lower risk or any less fallible, there would just be more companies in trouble that is all.
The real problem is the opaque way debt has been traded, as a commodity with a conventional underlying value.
In my opinion the approach of some governments is flawed. If you prop up some companies that have made a mess of managing their debt then you are giving out the message that massive unchecked debt is fine. Joe public can't do, neither can small companies. If the shareholders are not liable for losses then what incentive do they (sic) have for making balanced investments? Financial responsibility comes with a clear understanding of he balance between risk and reward. Nothing more complex than this. Yes you need to know what the risks are and then make your choice, but really is all there is to it. If I bet on a long shot on the horses and it doesn't come in then I expect to lose my wager. The markets are no different.
This situation will drag on for longer than is needed because governments keep giving out mixed signals. If the markets were left to their own devices, the weak would get culled (with job losses) then things would be rebuilt. Harsh and painful but fair. nationalisation is mostly just a quick way to burn money and give the temporary impression on control.
So why am I quite so harsh? Well, too much wine aside, this is costing taxpayers a huge amount without any control over the situation. In my opinion governments should be much smaller, lower cost - which directly means lower taxes, with much less interference in day-to-day live. The 'Tax freedom Day' in the UK is estimated to be the 2nd of June giving a rate of 42%. Other studies put this figure much higher. The US figures over the last Century make for interesting reading. http://en.wikipedia.org/wiki/Tax_Freedom_Day
This monologue was brought to you by the number 42 and too much Melbec.
Vino Interruptus, so -
With larger size comes economies of sale, up to a point, but more importantly the financial clout to get into new markets and expand. The wealth of experience within a large company (should be) well utilized and management the best that can be afforded. While it is true that the mistakes that then are made are larger - ABN Amro - it also means the successes are also bigger. Don't forget that we (most developed countries) have had an unprecedented period of growth, partly fueled by cheap borrowing. The question comes down to, would you give up that huge growth for much smaller returns but more steady long term? Lets say you bought your house 10 years ago, and sold it tomorrow for about the same as you paid for it (after inflation) would this be ok with you or would you prefer an asset that could go up in price but might go down?
Smaller companies, as you set-out wouldn't be lower risk or any less fallible, there would just be more companies in trouble that is all.
The real problem is the opaque way debt has been traded, as a commodity with a conventional underlying value.
In my opinion the approach of some governments is flawed. If you prop up some companies that have made a mess of managing their debt then you are giving out the message that massive unchecked debt is fine. Joe public can't do, neither can small companies. If the shareholders are not liable for losses then what incentive do they (sic) have for making balanced investments? Financial responsibility comes with a clear understanding of he balance between risk and reward. Nothing more complex than this. Yes you need to know what the risks are and then make your choice, but really is all there is to it. If I bet on a long shot on the horses and it doesn't come in then I expect to lose my wager. The markets are no different.
This situation will drag on for longer than is needed because governments keep giving out mixed signals. If the markets were left to their own devices, the weak would get culled (with job losses) then things would be rebuilt. Harsh and painful but fair. nationalisation is mostly just a quick way to burn money and give the temporary impression on control.
So why am I quite so harsh? Well, too much wine aside, this is costing taxpayers a huge amount without any control over the situation. In my opinion governments should be much smaller, lower cost - which directly means lower taxes, with much less interference in day-to-day live. The 'Tax freedom Day' in the UK is estimated to be the 2nd of June giving a rate of 42%. Other studies put this figure much higher. The US figures over the last Century make for interesting reading. http://en.wikipedia.org/wiki/Tax_Freedom_Day
This monologue was brought to you by the number 42 and too much Melbec.
Edited by Olivero on Tuesday 3rd March 03:43
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