Antitrust For Banks? Ask Carl Shapiro

The Department of Justice seems to thinking, at least in principle, about potential antitrust action in and around banking. Assistant Attorney General Christine Varney spoke about this yesterday, but her exact wording is open to interpretation, “”I have to ask if too big to fail is a failure of antitrust enforcement.” (The press release was uninformative on this point)

More encouraging was the background briefing given to the New York Times, as seen in this paragraph:

“Ms. Varney is expected to say that the Obama administration will be guided by the view that it was a major mistake during the outset of the Great Depression to relax antitrust enforcement, only to try to catch up and become more vigorous later. She will say the mistake enabled many large companies to engage in pricing, wage and collusive practices that harmed consumers and took years to reverse.”

The thinking among antitrust experts has been that there is not much market power, conventionally defined, in financial services. But this thinking may change, for at least three reasons.

  • There is definitely less competition now in investment banking (no more Lehman or Bear Stearns). Banks are bragging that their fees and trading profits will consequently be higher.
  • Reportedly aggressive action by investment banks, vis-a-vis particular countries/securities, grab headlines. One way to think about these alleged actions is an exercise of (socially destructive) market power. Predatory practices are surely easier to get away with in a period of global confusion.
  • Changes in fees for overdrafts are beginning to attract attention. This may be a matter for bank regulators rather than antitrust, or even for a financial products consumer protection agency to be named later (remember Joe Stiglitz’s recent testimony), but it does make you ask: what is the market structure that allows banks to do this?

There is an awkwardness to these concerns, of course, because Phase II of Larry Summers’ Recovery Model calls for banks to earn their way back to reasonable capital levels. Banks know they now have a high level of political cover and are likely to act accordingly. If the Department of Justice moves towards banks, it will presumably be stalled by Treasury and others.

Still, the legal system has a dynamic of its own. And Carl Shapiro, Deputy Assistant Attorney General for Economic Analysis, is completely capable of thinking clearly about our new (?) Too Big To Fail economy – e.g., start on p.108 of his book for ideas that begin to be more broadly relevant to the debate on finance today. With some help, he and his DoJ colleagues can figure out how best to bring public policy to bear.

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About Simon Johnson 101 Articles

Simon Johnson is the Ronald A. Kurtz (1954) Professor of Entrepreneurship at MIT's Sloan School of Management. He is also a senior fellow at the Peterson Institute for International Economics in Washington, D.C., a co-founder of, a widely cited website on the global economy, and is a member of the Congressional Budget Office's Panel of Economic Advisers.

Mr. Johnson appears regularly on NPR's Planet Money podcast in the Economist House Calls feature, is a weekly contributor to's Economix, and has a video blog feature on The New Republic's website. He is co-director of the NBER project on Africa and President of the Association for Comparative Economic Studies (term of office 2008-2009).

From March 2007 through the end of August 2008, Professor Johnson was the International Monetary Fund's Economic Counsellor (chief economist) and Director of its Research Department. At the IMF, Professor Johnson led the global economic outlook team, helped formulate innovative responses to worldwide financial turmoil, and was among the earliest to propose new forms of engagement for sovereign wealth funds. He was also the first IMF chief economist to have a blog.

His PhD is in economics from MIT, while his MA is from the University of Manchester and his BA is from the University of Oxford.

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