Daily Video

February 3, 2010

Are Big Banks Good for the Economy?

The Obama administration is trying to rein in the activities of big banks and corporations that engaged in the risky trading that helped bring about the recession. Robert Kelley of the Bank of New York disagrees, saying that the U.S. economy needs big banks.

The Bank of New York is the country’s oldest bank and its CEO Kelly argues that in a capitalist country like the U.S., no company should be “too big to fail.”

“You should allow them to fail,” Kelly argues. “And the question is, how do you do it without it impacting the rest of the banks in this country, as well as create a global financial crisis?”

In this part of his ongoing series on Making Sense of the economy, NewsHour economics correspondent Paul Solman talks to Kelly about why he believes President Obama’s plans are a mistake.

Quotes

“For the less healthy banks who are still trying to rebuild capital and profitability, will they reduce lending because of this, because of this tax? Will they reduce the number of people they employ to help their bottom line? Will they try to pass the costs on to customers? It doesn’t feel constructive to me in many ways.” – Robert Kelly, Bank of New York

“Many of big, big international corporations based here in the United States want to move money around the world very easily and simply. And you can’t do that with small banks. You need big, successful, sophisticated, profitable banks with lots of capital.” – Robert Kelly

“No bank should be too big to fail. That is my view and that is our industry’s view. Capitalism works. Darwinism works.” – Robert Kelly

Warm Up Questions

1. Do you keep money in the bank?

2. How do banks work? Where is your money kept?

Discussion Questions

1. Why is the government proposing a tax on large banks? What is the nature of that tax? What is it supposed to accomplish?

2. What undesirable “unintended consequences” might a new tax on large banks have?

3. What are the reasons for big banks? Why did banks grow so big?

4. Are the rewards (benefits) to the US economy of “too big to fail” banks worth the risks to taxpayers?

5. What are “economies of scale”?

6. Do you trust CEO Kelly and his board of directors to protect the bank from taking too much risk?

7. Kelly referred to having invested in AAA bonds which turned out to be CCC. Who rates bonds? Do the ratings agencies share the blame for what has happened? Would it have been possible for any investor to figure out that these were not AAA bonds?

8. Do you think the difference in Bank of New York Mellon’s “business model” might make it uncharacteristic of the industry?

9. Do you believe that the government really would NOT bail out a major bank if another crisis loomed?

10. IN-CLASS DEBATE: Are big banks good for America or would we be better off returning to the somewhat smaller ones of a decade ago? (A limit on size of 1% of GDP, say, as economist Simon Johnson suggests)

Additional Resources

Read the transcript of this report

Making Sen$e

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