Sen. Richard Shelby (R-Ala.) defended his view that the major U.S. banks should be allowed to fail, in contrast to indirect criticism of his opinion from Federal Reserve Chairman Ben Bernanke.
“I don’t believe anything is too big to fail,” Shelby told CNBC. “When you keep it open, you pump a lot of taxpayers’ money into it. That’s what they’re doing. I have differences with that, with Chairman Bernanke and others.”
The FDIC has been stepping in to close smaller, regional banks, but the biggest Wall Street banks have managed to sidestep closure by taking in hundreds of billions in taxpayer loans.
That has led some to warn that the big banks risk becoming non-functional “zombie” banks, similar to what happened in Japan in the 1990s — banks in name only, neither lending nor operating anywhere close to their previous capacities. A variety of economists and bank watchers have declared the largest U.S. banks already insolvent.
Shelby continues to say: Shut ’em down.
“We let the market dictate everything else. We could let the market dictate this,” he said.
“I think it was would save the taxpayers’ money in the long run. It would be quick disposition of the banks. It always is. Look what FDIC does. You could do it with a big bank, too.”
Of course, the unspoken risk is that shutting a large bank might provoke a deepening of the credit crunch, similar to the shock when Lehman Brothers shut down in the fall. Nevertheless, the alternative — pumping in truckloads of cash to little obvious effect, as has happened with insurer AIG — doesn’t appeal to Shelby in the least.
“I don’t think there’s any institution, other than the government, that cannot fail,” Shelby said.
“There’s pain, and there’s misery, and there’s a downside to failing, but there’s a quick dispatch of things when you let the market decide things rather than politicians,” he said.
Bank of America CEO Ken Lewis this week warned that nationalization of major banks would create a false impression of their condition and lead to de facto failures, even though many big banks are in much better shape.
"Investors would immediately start betting on which banks would be next, possibly creating a self-fulfilling prophecy," Lewis said in a speech this week. "And government control of large banks would politicize lending decisions and the capital allocation process, damaging the economy."
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