Sunday, May 20, 2012

Too Big to Fail Has an Obvious Solution: Break Up the Banks


The recent JP Morgan mess illustrates one of the major dysfunctions of our corrupt political age: an inability to translate obvious solutions into policy. It is often the case, though not always, that there are clear and good solutions to what seem like intractable problems. These solutions could be implemented if they had enough support, but many mental and structural barriers intervene. The mental barriers include obfuscation by interested parties, pundit cynicism, the Left's characteristic diffidence, and other factors. The structural barriers include the wads of corporate cash political campaigns and in the legislative lobbying system, which ensures that only solutions good for monied interests win, or are even heard.
JP Morgan under the leadership of CEO Jamie Dimon made a huge error that cost it some $2-3 billion dollars and has cast doubt on its viability as a financial institution. Since no organization run by we flawed human beings is error-free, the causes of that loss are pretty much beside the point; the magnitude of the loss is not. Will JP Morgan collapse, as Bear Stearns would have in 2008 - if it hadn’t been bought out by JP Morgan Chase? Will JP Morgan’s potential failure require public bailout? That JP Morgan is so huge that it’s failure would be devastating to an already weak economy is a reminder of how dependent our economy is on these huge banking institutions. Their size, and consequently our dependency, has only increased since 2008. Yet no effective regulation of finance has been put into place to prevent another meltdown.
In short: be afraid. Be very afraid. Why?Because there are no rules for the bankers.
Our financial system is quite clearly an oligopoly. A monopoly, I'm sure you know, is when a single company effectively controls an entire industry, therefore killing the "free market" by eliminating competition. Monopoly leads to all sorts of negative consequences, including stagnant innovation, poor customer service, bad product quality, high prices, and the accumulation of superprofits, which are then corruptly fed back into the political system to protect the monopoly. A monopoly is a concentration of power, both economic and political. Communism is not the only enemy of markets and liberal democracy, for monopoly is too, something conservatives always seem to forget. 
Oligopoly is just like monopoly except that instead of one colossal firm controlling the entire market, several slightly smaller but still giant ones do. Therefore there is still a modicum of competition, although with only a few firms in the market that competition is much less than in a market with many small businesses. All the negatives of monopoly exist also under oligopoly, albeit to a somewhat less odious degree: stagnant innovation, poor customer service, bad product quality, high prices, and the accumulation of superprofits, which are then corruptly fed back into the political system to protect the oligopoly. Oligopoly is a concentration of power, both economic and political. Communism is not the only enemy of markets and liberal democracy, for oligopoly is too, something conservatives always seem to forget. indeed, oligopoly in the economy leads directly to oligarchy in the polity. That we have allowed giant firms to exist in such a key sector as banking, which channels society's money supply, holds people's life savings in storage, and steer's society's capital investment, is a danger to us all.
There is a traditional and obvious solution to monopoly and oligopoly that is accepted across the political spectrum, from libertarian conservatives to progressive liberals: anti-trust. Break up the banks that are too big to fail. Isn't that as clear as the light of day? If the banks are too big to be allowed to fail, then make them smaller! Break the banks, mutual funds, stock brokerages, etc. into very small businesses. That way the competitive pressures that businesses do put on each other will cause them to check and balance each other, smaller size will limit the damage that any bank failure can cause, and the ability to accumulate profits with which to poison the political system will be limited.

This is a very workable solution at present. Conservatives have to accept it, for it is in fact part of their market doctrine that markets must consist of large numbers of small firms in order to be competitive and free, and that as market concentration intensifies, markets cease to thus be competitive and free. And liberals will accept anti-trust as a useful step for reigning in the financial institutions that have concentrated wealth to such a great degree. Democratic socialists like me would not only break them up, but make the smaller banks owned by their communities or by worker and consumer cooperatives, but one step at a time is OK.
Some will scoff at this solution as politically impractical, and, as my first paragraph indeed recognizes, there are significant barriers in the way of achieving it. Nonetheless it is worth calling endlessly for such an obvious solution like "break up the banks that are too big to fail." First, you can't win if you don't try: saying that something is politically impossible often makes it so, as the vicious logic of self-fulfilling prophecy causes you to defeat yourself. Second, repeating an obvious solution in the public sphere agin and again combats conservative obfuscation, simply by virtue of the solution being obvious. It will sink in over time to enough people, including decision-makers. Third, relentlessly pressing your position keeps it in the public sphere, so that it is easier to implement when the moment is ripe: people turn to the solutions that are in the air when a crisis occurs, so yours had better be the one taking up most airspace. Lastly, endless repetition of an obvious solution like breaking up big banks puts pressure on politicians over time. Witness that as matters have gotten worse in Europe, repeated anti-austerity voices are finally starting to crack neoliberalism; if there was enough pressure this year for anti-trust in public debate, breaking up the banks would become an issue that haunts the presidential election.
It is always best to stand for principled solutions, and to repeat them endlessly even in the face of cynics who tell you that they are not politically possible. Anti-trust is ano-brainer: the banks are too big to fail, so break them up. The market will work better and we'll get more equality to boot. 

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