Old Dogs, Same Tricks

We are far from being card-carrying members of the anti-Wall Street crowd here at Blawgconomics. Indeed we admittedly tend to be more on the pro-bank end of the spectrum when it comes to regulatory matters and feel that firms should be allowed to take on risks without government interference if they so wish. However, we also feel that they should be responsible for those risks, one of the main reasons we were against bank (particularly investment bank) bailouts. We get all of the arguments about 'too big to fail' and systemic shocks, however by allowing a taxpayer-funded safety net rather than survival of the fittest to be the guiding principle of the banking regulation, the powers-that-be almost provoked banks into continuing to take on excessive risks.

Now, no less an authority than Carl Icahn is suggesting that such provocation has already led to a reemergence of the same types of behaviors that contributed to the recent problems on The Street. Like Blawgconomics, Mr. Icahn can not honestly be considered to be anti-bank by any means. Speaking with CNBC at an investment conference in New York, the billionaire investor said plainly enough, 'I think we're going back to the same crap.' He added, '(There’s) just, way too much leverage, way too much risk taking with other peoples money.'

While it is impossible to say exactly what the world would look like today had the Fed not taken aggressive action to steady bank balance sheets over the past few years, it is not difficult to link the actions that have been taken with the return of risky behavior by bankers. The lesson during bailouts was, if you can prove that you are a critical part of the system, that you are 'too big to fail', then the American taxpayer will bail you out. True, very little regulation has been put into place since then; however if banks with too much risk had been allowed to implode at the time, more lessons would have been learned making increased regulation less necessary.

As it is, and in the words of Mr. Icahn, 'I do think though that there could be another major problem. Now will it happen next week? Next year? I don’t know. And that, certainly nobody knows. But I don’t think that the system is working properly.' We don't know if Mr. Icahn agrees with our supposition that bailouts were inherently dangerous for the long-term health of the banking system, and we certainly don't want to put words in his mouth. However, it does seem like he is buying into the idea that problems are back, and that aggressive risk taking is the main reason. In other words, the same old dogs are up to their same old tricks.