Federal regulators are now requiring the country’s eight biggest banks to reserve more capital in order to safeguard against another publicly-funded bailout.

The usual suspects include:

  • JP Morgan Chase;
  • Wells Fargo; and
  • Goldman Sachs.

The Big Boys of Banking have until January 2018 to raise capital equal to 6% of their total assets.

Last time around, the U.S. taxpayer was stuck with the $450 billion bill when the Too Big to Fail brethren were about to go belly up. Next time, regulators want to be sure our financial institutions are able to cover their own losses. The move targets the firms most notorious for gambling with the global economy during the frenzied years leading up to the Millennium Boom.

In a related development, unlikely bedfellows Senators Elizabeth Warren (D-Mass.) and John McCain (R-Ariz.) debuted a bill to revive the Glass-Steagall Act. The Depression-era rule barred commercial banks from making risky investments with FDIC-insured deposits – your money. It was repealed in 1999, after years of defanging at the behest of the banking industry.

If you’ll recall, that coincides with the dizzying boom-time proliferation of exotic financial instruments like hybrid ARMs and layered MBBs. We all know how that ended a decade later: the housing crash and ensuing Great Recession.

These initiatives are picking up bipartisan steam. In July, the Glass-Steagall revival bill had 69 co-sponsors from both sides of the aisle. Perhaps that comes right on cue, as big banks continue to get bigger and richer – five of the eight largest banks now control almost four of every five dollars of bank assets nationwide.

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first tuesday insight

While Senators Warren and McCain are busy trying to prevent a future bank bailout, the American consumer is still waiting for theirs.

Tighter banking regulations bring needed stability and security to financial markets and obviate another massive taxpayer-funded rescue. But they only address a handful of symptoms of our ongoing economic influenza.

In the 2008 financial crisis, the government propped up a failing segment of the private sector to prevent even more economic chaos. This step was necessary, and it saved us from descent into an actual depression. Never mind the fact the banks were stuck in a mire of their own making – they were, infamously, “too big to fail.”

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But the average citizen still struggles with ruined credit, negative equity, flat-lining wages and stagnant job growth. In a sense, they, too, are “failing” – and it’s proving to be an unabated drag on our pallid economic recovery.

It doesn’t help that the employer of last resort – the federal government – is not able to implement job creation. In fact, employment has been reduced by governments just when jobs are needed.

If we can justify a government rescue of the banking industry to keep the financial side of the economy ticking, why not entertain doing the same for the ailing giant that animates the whole thing: the consumer?

Start by re-balancing the public’s balance sheet. Cram down principal mortgage balances to bring loan-to-value ratios (LTVs) closer to earth, reintroducing badly-needed equity so property can be sold conventionally by brokers and agents. Reduce homeowner debt to get the consumer and housing markets moving again.

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To really rev the economic engine, though, stimulating job creation is key. A recovery of any kind is only sustainable if there are steady gains in employment. The Federal Reserve’s (the Fed’s) current program funnels stimulus money to the investing class, which is not translating to improved prospects for consumers or jobseekers. Redirect that stimulation to:

  • education;
  • research and development;
  • Infrastructure; and
  • other sectors that directly support job growth and fuel consumer spending.

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Regulating banking is great insofar as it helps prevent another financial mess from derailing the fragile recovery. By and large, though, the political rhetoric of getting tough with unscrupulous banks distracts from the root issue: the consumer economy is still floundering, in desperate need of a concerted push to get people back to work again.

Re: “A ‘too big to fail’ crackdown: U.S. regulators hit big banks with tougher standards,” from the Washington Post and “Sens. Warren, McCain propose new Glass-Steagall bank restrictions bill,” from the Los Angeles Times