Bernie and the Banks
Bernie Sanders has picked a good target: big banks.
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Bloomberg reports:
Senator Bernie Sanders proposed legislation to break up the nation’s biggest banks, including JPMorgan Chase & Co. and Bank of America Corp., setting up a contrast with Hillary Clinton as both seek the Democratic presidential nomination.
One of the most interesting aspects of modern American politics is the amazing similarities between hot-button issues of the far left and the far right. The solutions they offer are often wildly different, but the problems they complain about are surprisingly similar.
Conservatives are often seen as on the side of business and capitalism. We are, but by "business and capitalism" we mean "free, fair, and open competition." In our age of overwhelming government regulation, that means small business; due to regulatory capture, large businesses can all too often use their government connections to kneecap competitors and stifle innovation that might cut into their profits.
Nowhere is this more true than with big banks. We see the results today, from the the death of the free checking account to the housing bubble in which banks were forced by government fiat to make loans to people who couldn't pay them back and were then bailed out at taxpayer expense by that same government.
What was the end result of all these machinations? Bank mergers, forced by the government, resulting in ever-bigger corporations that are now too big to be allowed to fail no matter how poorly they serve their customers. For all practical purposes, giant banks are an arm of the government without any of the democratic accountability to voters that should go with being part of government.
We've written previously that this is intolerable; banks that are too big to fail are too big to exist. There's a reason we have anti-trust laws, the same reason these laws were put in place by Republican Teddy Roosevelt: if a market is captured by one or a handful of enormous companies, it's not competitive anymore and the public will be fleeced.
Possibly the most severe consequence of Republicans' traditional inability to string two words together into an intelligible argument is that most people think America is a capitalist country. It's not, and hasn't been for quite a number of years.
Capitalism is a state of free and open competition, with everybody kept honest by an impartial government and customers free to reward vendors as they see fit.
What we have today bears no resemblance to capitalism at all. Government buries every possible business activity under an avalanche of regulation that no small business can possibly hope to understand much less follow. The government doesn't have enough inspectors to catch everybody, but the threat is always there if some politically connected competitor gives a bureaucrat the right poke. A drug dealer's favorite way of dealing with competitors is ratting them out to the police; the same is true of giant corporations.
This isn't capitalism and it isn't competition; it's much more like fascism where private companies nominally own and operate everything but the government calls the tune. It's enlightening to note that both the far right and the far left call our current government fascist; they're not entirely wrong.
Many issues identified by Socialist Bernie Sanders and the Occupy movement are, in fact, legitimate complaints. The only trouble is that they often attack the wrong target. They rail against liberty, business, capitalism, and freedom as a whole, instead of attacking government where all these problems originated.
When Sen. Sanders attacks big banks, that isn't an assault against freedom or business. It's a rightful response to "companies" that don't compete but loot, using their bought politicians to keep taxpayer money flowing into their pockets. It's not socialist to oppose this, nor is it conservative, it's simply American.
Banks have nothing to fear from Hillary Clinton; like Mr. Obama and Bill, she is friends with the super-rich and powerful and will do their bidding. Mr. Obama appointed so many who'd previously worked for just one megabank, Goldman Sachs, that the place was known as "Government Sachs." It sometimes seemed as if he'd outsourced financial regulation entirely.
Bernie Sanders is cut from different, more honest cloth. In this specific instance, the far left has gone full circle and connected with the far right on the opposite side, and we both agree that the big banks are too big.
The political spectrum isn't a straight line. As this issue illustrates, it's actually a circle, and we've looped 'round to the backside. This election will be fascinating.
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What does Chinese history have to teach America that Joe Biden doesn't know?
I would emphasize the point that it was government regulation in the first place that is responsible for banks growing in size. Regulatory compliance is a fixed cost. The larger the enterprize, the better able it is to absorb the cost. Additionally, it was the dissolution of interest rate regulations (known as Reg. Q) that made asset/liability management too complicated for the small town banker. The United States was and is still unique in the world when it comes to the number of financial institutions. We once had over 20,000 banks, savings & loan associations and credit unions. Today we have about a quarter of that number, concentrated by number at the small end and by assets at the large end, a barbell, if you will. We also are, perhaps, the only country in the world with a dual chartering system, meaning with both national and state charters, which further bollixes things up. By contrast, Canada, which is one tenth the size of the U.S., has a total of six, count'em, six banks: Bank of Montreal, Royal Bank of Canada, Toronto-Dominion Bank, Canadian Imperial Bank of Commerce, Scotia Bank, and National Bank of Canada. Most other countries have well under 100 banks each. It is not the size of the bank that is the issue, but the political will to let them fail.
But the consumer still has choice. I choose to bank at an Internet bank, E-trade, where instead of paying for bricks and mortar, they absorb all my ATM fees, no matter whose ATM I use. As for "free checking", there never was such a thing. You always gave up the right to make a market rate of return on the interest foregone by having a checking account. Checking accounts, with their high levels of activity, are more expensive to administer than a straight forward deposit account. Banks attack the cost structure through automation and spreading the costs over larger amounts of deposits. Because of low interest rates and the abundance of liquidity, the deposits are worth less to the bank, but it must still recover the operating costs, and therefore does so so with deposits minimums and fees.
Banks have always been people's favorite whipping boy, sometimes deservedly so. But most of what banks have become is a direct response to markets, technology and government regulation to which they are subjected. The image of a banker is neither that of a Henry Potter nor a George Bailey. The large salaries and bonuses for investment bankers and top managers do make them seem like rapacious Snidely Whiplashes, but then, that happens in a free market. No one is required to bank with them, just as no one is required to go to a movie featuring $20 million-a-picture actors or a football game featuring a bunch of multi-millionaire semi-illiterates.
jfv2000
As Sandy Weill, who ironically engineered many of the big bank mergers that ultimately formed Citigroup, himself said -- we need to break up the big banks. The universal banking model, where investment banks and commercial banks are fused, has failed.
Let's repeal Dodd-Frank, which created a huge, unaccountable government bureaucracy, and re-enact Glass-Steagall.
Glass-Steagall, much like Reg. Q, was circumvented by technology, well before it was formally done away with. Market discipline is still better than regulatory effort. Getting rid of "too-big-to-fall" doctrine would be a step in the right direction. You can still insure retail deposits. No other developed country has a Glass-Steagall firewall and merchant banking and commercial/retail banking co-exist, side-by-side in the same institution. I am currently visiting relatives in Canada where there are 6 banks in the whole country. Canada is roughly 1/10th the size of the U.S., but relatively speaking with the number U.S. banks, it should have roughly 120 banks. Most of the OECD member countries have much more concentrated banking than the U.S. Regulatory burden (overhead expense) and asset/liability rate and duration management have driven consolidations in this country were responsible for the number of independent financial institutions dropping from 20,000 to 1,500 or so during the past 30 years. Glass-Steagall is not the problem!