The Real Problem with the Big Banks

Posted by James Surowiecki

Ask what’s wrong with America’s banks, and you’re likely to hear that they’re just too complicated, too opaque. Banks are doing too much trading and not enough traditional lending, and their speculation with complicated financial instruments (like the ones that led to J. P. Morgan losing six billion dollars with its “whale” trade last year) is a recipe for disaster, with the financial crisis of 2007-2008 seen as proof positive of the dangers of too much complexity and too little disclosure. (Thus Jesse Eisinger and Frank Partnoy argue in last month’s Atlantic that the panic of 2008 resulted “from a lack of transparency.”) And so we get calls for banks to simplify their operations—to go back to what’s often called “plain vanilla” banking—and to disclose more about what they’re doing. This quest for simplicity and transparency is understandable in a world of collateralized-debt obligations and endlessly proliferating derivatives. But it doesn’t actually get at the heart of the issue. The fundamental problem with the banks isn’t that they look (and act) more and more like hedge funds. The fundamental problem with banks is what it’s always been: they’re in the business of banking, and banking, whether plain vanilla or incredibly sophisticated, is inherently risky.