Washington Recaptured

Two hundred years ago, Washington, DC, was captured by the British – who then set fire to official buildings, including the White House, Treasury Department, and Congress. Today, it is a domestic interest group – very large banks – that has captured Washington, and the costs are likely to be far higher than they were in 1814.

WASHINGTON, DC – Two hundred years ago, Washington DC was captured by the British – who then proceeded to set fire to official buildings, including the White House, Treasury Department, and Congress. Today, it is a domestic interest group – very large banks – that has captured Washington. The costs are likely to be far higher than they were in 1814.

America’s largest bank holding companies receive an implicit government subsidy, because they are perceived to be “too big to fail.” The authorities will not allow the biggest banks to default on their debts, through bankruptcy or in any other fashion, owing to the need to prevent the financial system from collapsing. This doctrine became starkly apparent in late 2008 and early 2009; it remains in force today.

This effective exemption from the risk of bankruptcy means that anyone who lends to the largest half-dozen banks receives a government guarantee – free insurance against the risk of a catastrophe. This allows these banks to obtain more debt financing on better terms (from their perspective). In particular, their executives operate highly opaque firms, with risks effectively masked from outsiders and very little in the way of loss-absorbing shareholder equity. Simply put, without their government backstop, these murky empires could not exist.

To continue reading, please log in or enter your email address.

To read this article from our archive, please log in or register now. After entering your email, you'll have access to two free articles every month. For unlimited access to Project Syndicate, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/cYlqJpb;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.