Here’s a question for the Power Line Classroom to discuss: should we break up the big banks?
I’ve always been a skeptic of antitrust law and doctrine. Over the decades antitrust activity has often been arbitrary, incoherent, and counterproductive. The economic historian Jonathan R.T. Hughes, for example, once described the Sherman Act as “an institutional sumptuary law for business enterprise.” And one prominent legal scholar in the late 1970s emphasized the Machiavellian character of antitrust laws by comparing their working to the tradition of the frontier sheriff: “He did not sift the evidence, distinguish between suspects, and solve crimes, but merely walked the main street and every so often pistol-whipped a few people.” (That legal scholar’s name? Antonin Scalia.) Many other scholars worked out persuasive analyses of antitrust that contend that antitrust laws actually reduced competition within American industry.
The scaling back of antitrust that took place in the late 1970s and early 1980s was one of the most significant pro-market reforms of the last half of the 20th century, and while we still have some antitrust review and enforcement (Microsoft in the 1990s, airline mergers, maybe Google up next), its scope is much narrower than it used to be. Everyone now agrees that the 13-year antitrust case against IBM that ran from 1969 to 1982 made no sense whatsoever. And it is significant that for all the revival of old liberal Keynesianism and regulatory ideas recently, there really isn’t anyone on the Left arguing for the revival of New Deal-era antitrust doctrine. No one is dusting off old tomes by Gardiner Means and Adolph Berle.
However, a single startling fact in yesterday’s Wall Street Journal article by Richard Fisher and Harvey Rosenblum of the Dallas Fed ought to fix our gaze for a moment:
Since the early 1970s, the share of assets controlled by the five largest banking institutions in the U.S. has tripled to 52% from 17%. With size came complexity, magnifying the opportunities for opacity, obfuscation and mismanaged risk. . . Increased concentration dramatically intensifies the impact of distressed banks on the economy and diminishes monetary policy’s ability to improve economic performance. . .
The phrase “too big to fail” is misleading. It really means too complex to manage. Not just for top bank executives, but too complex as well for creditors and shareholders to exert market discipline. And too big and complex for bank supervisors to exert regulatory discipline when internal management discipline and market discipline are lacking.
So I think I could be persuaded that the big banks should be broken up, though this requires conservatives and pro-market libertarians to set aside their cognitive dissonance over the use of centralized political power to accomplish such an end. Discuss in the comment thread.
However, let’s play out the twist ending, in the best Hollywood thriller tradition. If it is true that the big banks are too big to manage risk properly, what about the biggest financial institution of all—the Federal Reserve itself? Maybe it’s time not so much to “End the Fed,” as Ron Paul likes to say, but simply break it up.
If you go back 99 years to the debate on creating the Fed in the first place, one of the original ideas was that we’d create regional federal reserve banks, but not a centralized national Fed. The regional Feds would be closer to banking conditions in their area, could create reserves and backstop banks independently of other regions, etc. By degrees Congress settled on a hybridized and centralized model with the Board of Governors we have now for reasons I don’t quite recall, but with the regional Fed structure that we know today. In practice we still have some of the benefits of decentralized knowledge, such that the New York Fed is pre-eminent for obvious reasons, but in which some of the regional Feds, like Dallas and St. Louis, have often been hotbeds of independent thinking and analysis of economic conditions. (The Left, for example, has always had its gunsights on Richard Fisher, opposing his advancement in the Fed hierarchy.) But why not go all the way and break up the Fed for real?
That’s the bonus question for the class.
UPDATE: Don’t miss my pal Alex Pollock’s short squib about which banks are the most profitable:
Which are the most profitable banks in America? Not the private banks, but the government banks—namely the 12 Federal Reserve Banks.
In 2011, the 7,357 U.S. banks made an aggregate net profit of $119 billion. Only 12 Federal Reserve Banks made $77 billion.
The private banks made a combined return on equity of 7.8%. The Federal Reserve Banks’ combined return on equity was about 144%.
The private banks had leverage (total assets divided by equity) of about 9 times. The Federal Reserve Banks were leveraged 54 times.