Tuesday, March 23, 2010

Too Big To Fail?

My friend from Fordham University, Prof. Duncan James, sent me this link on this issue of banks that are too big to fail. I wrote some comments in the e-mail that he thought would fit well in the blog, so here goes.

I think that the argument for breaking up the largest bank is, although not something I would do in a perfect world, something I think is a good idea for today. (The best thing would be an absolutely credible commitment against the 'too big to fail' concept, but that horse left the barn a long time ago.) I think the argument for breaking up the largest banks is different than and much stronger than the old Teddy Roosevelt/Woodrow Wilson trust busting argument. People didn't appreciate back in that period how powerful a discipline against dominant firms the process of creative destruction can be. When I show the movie Pirates of Silicon Valley in my class, my students can scarcely appreciate how daunting the market power of firms such as IBM and Xerox seemed to be at that time. And, as industrial giants have fallen, we have concrete evidence that we as a society can survive. (Which is why I don't understand the point of Government Motors, but that's for another blog).

If it is indeed the case that we are stuck with a "too big to fail" scenario with large banks, I would much prefer that they be broken up into a size that would let them fail, as opposed to leaving them big and regulating them with ever more layers of "managed competition" (which is an oxymoron as far as I am concerned). A firm embedded in a massive web of federal regulations realizes that its survival depends less on what it can do in the marketplace and more of what its lobbyists can achieve in rent-seeking activities in Washington, D.C.. This is bad for the businesses and bad for consumers, but it's great for the real-estate owners and Neiman-Marcus stores in Bethesda and Fairfax County. I challenge anybody to deny the following prediction: one of the side effects of hiring more federal financial regulators or the layers of bureaucrats enforcing ObamaCare will be an even further concentration of wealth and power in the Washington, D.C. metropolitan area. (It's almost as though that were part of a master plan, no? Why else would the people who wrote ObamaCare insert a passage that exempts themselves [virtually all of whom most likely live in D.C. and environs] from their own requirements?)

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