Wall Street is Too Big to Regulate

This article written by Gar Alperovitz dated July 22, 2012 asked the question about this so called ‘giant’ bank corporations integrity in open market nowadays. The scandals of Barclays interest-rate scandal, HSBC’s openness to money laundering by Mexican drug traffickers, the epic blunders at JPMorgan Chase. Even if governments come up with contingency plan to break those banks up, would they stay broken up?

     As what we have learnt in microeconomics, Firms or corporations are the biggest player in markets as coordinators of economic activity and bringing it to its maximum efficiency because of their economies of scale. With large resources, they can affect the markets more thoroughly with their economic decisions. Monopolization of markets is achievable for these firms as there will be little presence of competition or absence of it for extreme cases. These monopolistic firms are certainly to take advantage over the competitors’ inability to provide close substitute products due to barriers to entry. For that exact reason these corporations are going to reap much higher profit by discriminating price knowing the inelasticity of demand on its product. Other downside when corporations get too huge, integrity and quality control is questionable as if they are too invisible to be hit hard over minor losses.

     Some economists in and around the University of Chicago, who founded the modern conservative tradition, had a surprisingly different take: When it comes to the really big fish in the economic pond, some felt, the only way to preserve competition was to nationalize the largest ones, which defied regulation. This notion seems counterintuitive with the current law available as it goes against the Capitalist’s principle of free-functioning markets. But for them, “bigness” and competition could easily become mutually exclusive. These big firms can easily run away from the political and economic system with their massive influence. They can easily create unrest in a society with the acknowledgement in their mind that they possess big interest within the system. The financial strength they have might sometimes be higher than certain countries’ GDP that would allow them to infiltrate into the systems easily.

     Monopolists can present a societal dilemma. With its market power, it has an incentive to raise the price above the competitive price and producing for their self-interest, not in the social interest. Governments need to intervene to regulate such unfair situation from happening by legislating laws. Rules administered by government are there to influence prices, entry and other aspects of economic activity in an industry. To implement regulations, the government establishes agencies to oversee and enforce the rules. After certain period of time when regulation of new law has successfully broke up monopoly, deregulation process rushes in to let the market works freely. But there will always be conflict of interest between the regulators and producers, lobbyists usually will stand against a more pro-social interest regulation and lobby for their cause as their incentive to get more profit is always greater than consumers.

     Antitrust Policy is one of the methods used by governments to monitor monopolists who gained that position through anticompetitive actions, creates substantial economic inefficiency, and appears to be long lasting. In the US, the relevant antitrust law is the Sherman Act of 1980. The most significant monopoly case of recent times is the Microsoft case which they have taken anticompetitive actions against competitors of their Window’s software. They signed illegal contracts with PC’s makers to feature their Internet Explorer on the PC desktop and penalized companies that promoted software products that competed with Microsoft products. Microsoft was sentenced to billions of dollars fines and payouts to their competing companies.

     Every industry should be either effectively competitive or socialized If other remedies were unworkable, the state should face the necessity of actually taking over, owning, and managing directly, All industries in which it is impossible to maintain effectively competitive conditions. At the height of the Depression, eight major economists (including Frank H. Knight) put forward a “Chicago Plan” that called for outright ownership of Federal Reserve Banks, the nationalization of money creation, and the transformation of banks into highly restricted savings-and-loan-like institutions. After all, in the mid-20th century, banks were far less concentrated than they are today, when the five biggest — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs — dominate the industry, with combined assets amounting to more than half of the nation’s economy.

     It’s also true that not all economists agreed with the proposal, especially on the controversial issue of nationalization. But the logic of his argument remains: With high-paid lobbyists contesting every proposed regulation, it is increasingly clear that big banks can never be effectively controlled as private businesses. If an enterprise (or five of them) is so large and so concentrated that competition and regulation are impossible, the most market-friendly step is to nationalize its functions. What about breaking up the banks, as many on the left favor? Recent history confirms while a breakup might work in the short term, the most likely course is what happened with Standard Oil and AT&T, which were broken up, only to essentially recombine a few decades later.

     Nationalization isn’t as difficult as it sounds. We tend to forget that we did, in fact, nationalize General Motors in 2009; the government still owns a controlling share of its stock. We also essentially nationalized the American International Group, one of the largest insurance companies in the world, and the government still owns roughly 60 percent of its stock. Of course, it would probably take another financial meltdown to make banking nationalization politically tenable. But given how the sector has behaved since the last crisis, a repetition seems inevitable, and sooner rather than later.

Posted by Aizat Naimi.