March 17, 2013

FUNCTIONING MARKETS DEPEND ON GOVERNMENT TO SET THE TERMS OF THE COMPETITION:

Why Conservatives Want to Break Up the Banks, Too (TIMOTHY NOAH, 3/16/13, New Republic)

Conservatives were wrong to oppose the government's bank rescue, but about one thing they were right: No bank should be "too big to fail." Dodd-Frank, the Obama administration explained, set in place prudent safeguards, but the right didn't believe these would work. The more left-leaning liberals (as distinct from centrist liberals, who place more faith in institutional authority) had their doubts, too. Why not just prevent any bank from being so large that its failure might wreck the economy? Averting a future bailout was the main concern, but not the only one. The implicit guarantee of a bailout for megabanks also amounted to a subsidy, skewing the market unfairly in their favor.

A bipartisan conversation began between left and right over the heads of the respectable center. It started in earnest with the publication of MIT economist Simon Johnson's influential 2010 book, 13 Bankers (co-authored with James Kwak), and has since then been percolating in publications like National Review and The Nation. Jon Huntsman called for bank breakup; so did Dean Baker, a left-leaning economist, and Richard W. Fisher, president of the Federal Reserve Bank of Dallas. "Too big to fail is too big to continue," Peggy Noonan wrote in a January Wall Street Journal column.

The critique has lately been embraced by a bipartisan cohort of working politicians. Vitter and Democratic Senator Sherrod Brown will soon co-sponsor legislation to limit bank size. Elizabeth Warren, a fellow banking committee member, will likely support their effort. A similar measure introduced by Brown in 2010 was opposed by the Obama administration and by all but one banking-committee Democrat. It failed on a Senate floor vote, 61-33. But Brown told me, "We would get a majority of [committee] Democrats today." Even in 2010, two current banking-committee Republicans--Richard Shelby and Tom Coburn--supported the bill.

Getting the Obama administration on board is the greater challenge, but Jacob Lew, the newly installed treasury secretary, has yet to demonstrate strong opinions on the matter. (His predecessor, Tim Geithner, was adamantly against bank breakup.) House financial services committee Chairman Jeb Hensarling, a Republican, continually complains that Dodd-Frank never solved "too big to fail." It isn't clear he'd support bank breakup, but Republican John Campbell is pushing a somewhat similar bill.

For conservatives who feel queasy advocating the breakup of private enterprises, MIT's Johnson offers this consolation: Remember George Stigler. Stigler, a conservative economist who died in 1991, won the Nobel for a theory that basically said Galbraith's partnership approach didn't work because of "regulatory capture," i.e., the various ways corporations tame their minders--for example, by maintaining a revolving door between industry and government. Rather than try to control powerful corporations, Stigler thought government should use antitrust law to break them up and let competition rein them in.

Posted by at March 17, 2013 8:57 AM
  

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