As much as I detest the involvement of the government in what are supposed to be free markets, I can appreciate the need for Uncle Sam’s stepping in to save our banking system in late 2008.
Now going on five years hence, it is time that we move to save capitalism. How do we do this? We need to break up the banks. Why so? Here’s a handful of reasons why:
1. Since 2008, the then too big to fail banks have only gotten that much bigger and hence would require that much more of a government bailout. Does anybody believe that the system could support itself without further government intervention? Really? In light of this information:
2. The four largest banks write approximately 50 per cent of the home mortgages in our country and issue close to 70 per cent of the credit cards.
3. The six largest banks hold assets close to two-thirds of the country’s GDP.
4. The five largest banks hold approximately 95 per cent of the derivatives. Can you say too big to fail right here?
The marriages of the banks – – – both by choice and by shotgun – – – have brought us a system that is not reflective of free market capitalism but one that is the essence of an oligopoly.
What are the key factors at work within an oligopoly?
1. Ability to set prices.
2. Barriers to entry across a wide array of business lines are VERY high.
3. Firms within the oligopoly can retain long run abnormally high profits.
4. Firms within the oligopoly can and will share, retain, and withhold perfect information and knowledge.
5. Individuals, firms, and institutions outside of the oligopoly do not have access to that information and knowledge and pay the price literally and figuratively in the process.
What is the other consequence of this oligopoly which has been developing on Wall Street over the last few decades and has only escalated as a result of the crisis?
Think of the major scandals on Wall Street and how they tie into this economic system.
1. The manipulation of Libor and other overnight interest rates that has likely been going on for the better part of the last twenty years.
2. Money laundering within the Treasury operations of the largest banks.
3. Price controls and glorified front running on the equity exchanges that are dominated by the trading of the major Wall Street banks.
4. Insider trading within hedge funds that is very often facilitated by the prime brokerage operations of the largest banks.
Shall I go on?
The oligopoly and cronyism is only further exacerbated by financial regulators — and especially the self-regulatory model – – – that operates really more like a pack of ineffectual meter maids than real financial cops. The oligopoly largely pays for its own regulation. How is that working? That model is rife with massive conflicts of interest.
What is the result of the oligopoly and cronyism? A pervasive lack of trust and confidence in our markets, our economy, and our government.
I firmly believe that breaking up the banks, reinstituting Glass-Steagall, and ending the self-regulatory model on Wall Street are issues that an overwhelming percentage of people within our nation will embrace and pols from both sides of the aisle can get behind.
In fact, we are starting to see that as just the other day the Financial Times highlighted in writing, Republicans Join Liberal View of MegaBanks,
America’s liberals have long demanded that the largest US financial groups be forcibly broken up following the financial crisis. Now, an increasing number of influential conservatives are joining their cause.
Republican lawmakers on Capitol Hill have introduced legislation and written letters urging government officials to study the allegedly harmful effects on financial stability and economic growth posed by “megabanks”.
Increasing attention on Capitol Hill coincides with rising attention among influential Republican commentators such as George Will of the Washington Post, Peggy Noonan of The Wall Street Journal and Erick Erickson of the blog RedState, who have argued that Republicans should embrace the idea of breaking up large financial groups.
“It is absolutely a conservative imperative to break up the big banks,” Mr Erickson recently wrote on his blog. “If we want smaller government, we need smaller banks too.”
Some regulators including Thomas Hoenig, Federal Deposit Insurance Corporation vice-chairman, have wanted to break up big banks for years.
Dallas Fed governor Richard Fisher is also a proponent of breaking up the banks and is speaking on this topic on Wednesday. I will speak on this topic this evening at The Monday Meeting in New York City.
How do people feel about this?