The Merger Menace

Bank mergers seem to be the wave of the future. With the merger of Citibank and Travelers, we have a bank extending from coast to coast for the first time. Other mergers are on the way. We are told that these giant banks will offer customers advantages that smaller banks cannot, which may be true, but no grounds for rejoicing. Certainly, an enterprise may grow in efficiency as it grows in size, and with this increased efficiency may come economy of operation, but only up to a point. The government, for instance, is an enormous enterprise, but hardly efficient or economical. Banks, like governments, have no need of efficiency or economy; they cannot spend money, only create it. They pay their expenses simply by writing checks. As it is the bank upon which the check is written which determines its "goodness," the bank's checks never bounce. Approximately five percent of the annual increase in the money supply consists of money created by banks for their own use. Thus, arguments for larger banks cannot, reasonably, be based upon claims of greater efficiency or lowered costs. In this writer's opinion, the appearance of mega-banks is a distinctly ominous sign.

As we have seen, banks fail when their assets are overwhelmed by their liabilities. Since banks create assets (i.e., loans) with the stroke of a pen, this failure occurs only to preserve the impression among the public that banking is a business like any other business, instead of a money-creation-for-loan scheme. The small bank in a small town may fail if its principal borrower, let's say the local cement plant, fails. When the plant's IOUs become worthless scraps of paper, ditto the bank's assets which those bits of paper comprised.

In a big town, it may take the failure of a huge corporation, such as an oil company, to bring down a large metropolitan bank. In either case, business resumes as usual when another bank takes over the defunct institution.

It concerns me, therefore, when we see the emergence of super-large banks. Does this mean that bankers anticipate the failures of many large businesses, or the increasing need to bail out insolvent governments? Are they gearing themselves for the economic shock of massive economic downturns, or outright failures? The larger the bank that fails, the larger the bank must be to pick up the pieces.

It can be viewed from the other direction, i.e., businesses which fail when banks fail, as opposed to banks failing when businesses fail, but the vista is equally unsettling. When the bank in a small town fails, the resulting distress is limited to that town, for the most part. When a large bank fails, such as one in Chicago, the disturbance to the economy is substantial, and spread over a much larger area. What if a mega-bank, despite its immense size, fails? The shock would be felt not just in America, but throughout the world. Business failures can trigger bank failures, and the bank failures in turn could trigger additional business failures, then more bank failures, etc. A very vicious circle indeed, and the larger the banks involved, the more vicious the circle.

The failure of such a huge institution is unthinkable. You can be sure that the government, dependent upon the credit created by the banking system, will not let one of that system's largest player be sent to the showers. The cost of the bailout will be placed, of course, upon the shoulders of Americans, either directly, through taxation, or indirectly, via inflation. And, given the success the banking industry has enjoyed to date in convincing Americans that their economic problems are caused by Arabs, Japanese, or labor unions (or management, etc.), the citizens will be convinced that the fault lies somewhere other than in the monetary system which brought it about.

Modern banking seems to be a gigantic confidence game: the seizing of the wealth of the middle class (which produces most of it) in exchange for bank credit, which is produced only by banks, and entitles the holder to nothing of the bank's. (He is able to use it because he and others place confidence in it) The larger banks become, the greater number of people at risk, either of the bank's eventual collapse, or even of the unlikely event of the public's waking up to the absurdity of modern "money," and declining to use it. Henry Ford is said to have remarked that if the people knew how banking worked, there'd be a revolution before morning. It's no secret how banking works, but people haven't grasped the idea yet, although as economic conditions worsen, more and more might see the light.

When a jet fighter crashes, the pilot may die. When a 747 crashes, hundreds may die. The new mega-banks make a 747 seem like a Piper Cub. If they should crash, who'll pick up the pieces?