At the New York Times’s DealBook, Michael Corkery and Jessica Silver-Greenberg suggest the possibility of a concordat between populist political foes Elizabeth Warren and Donald Trump.
The Massachusetts Senator and the President could, according to the story, find common ground on the goal of shrinking or breaking up the country’s biggest banks, both recommending a rehabilitated, 21st-century version of the Glass-Steagall Act.
{mosads}In an era of “too big to fail,” it’s difficult to take issue with the general proposition that America’s banking behemoths have indeed grown too large and integrated. Yet the question of whether to “shrink big banks,” is nonetheless confused, based on a misunderstanding of the connection between industry consolidation and government intervention—and thus turning the causal chain on its head.
In fact, all through American history, government intervention in the financial services industry has tended to concentrate power in major banking institutions, to reduce the competitiveness in the market by disadvantaging smaller banks.
Contemptuous of free-market economics, populists of both the left and the right like the idea of an energetic federal government stepping in to simply solve the problem. They share the facile assumption that policymakers and regulators are pledged nobly to the national interest or the common good, while corporate boards and investors are selfishly focused on profit alone.
Confronted with historical insights and empirical observations, this neat populist narrative quickly falls to pieces. In point of fact, powerful commercial interests are often at the forefront of pressing for competition-stifling new laws.
As philosopher Jason Brennan argues, “When we try to increase government control over the economy, corporations, in turn, seize that for themselves.”
The assumption that animates much of political discourse today — that there is necessarily an inverse correlation between government power and corporate power — flies in the face of available data.
This kind of populist thinking furthermore begs the question: it simply assumes that questions about the size and scale of our economic institutions ought to be decided by a small (indeed, infinitesimally small as a percentage of the population) group of politicians and bureaucrats, whom we ought to consider interested parties, and therefore conflicted, given their close ties to the rich and powerful.
The industry interests to be regulated are mobilized and have much better access to elected officials than the population at large. They hire dedicated professionals who devote millions of man-hours and dollars to influencing the legal and regulatory frameworks in which their firms operate. This is not at all to suggest tenebrous conspiracies, hatched in back rooms and involving explicit quid pro quo exchanges.
These facts instead recommend a practiced skepticism (if not cynicism) toward politicians’ lofty invocations of the common good—and, relatedly, their supercilious, misguided rebukes of free-market competition.
Rather than trying to achieve legitimate consumer protections goals by settling on a new, often quite arbitrary recipe of regulations, policymakers should concentrate their attention on the processes through which those goals are reached, processes based on opening the way for competition.
Fair competition within a stable framework of simple rules channels incentives away from political rent-seeking and toward broadly shared goals of stability and consumer-protection. The regulation-plagued status quo certainly isn’t working according to the best laid plans of its proponents.
The Obama years saw less competitiveness and more consolidation in the banking sector, as smaller banks, drowned in a deluge of costly new rules, were effectively driven out of business. And this industry consolidation ripples through the entire economy, as community banks are responsible for “over three-quarters of agricultural loans and half of small business loans.”
Banking history, too, offers lessons that policymakers have neglected at the peril of consumers and taxpayers. Scotland’s move away from a relatively free banking system provides a historical example of rent-seeking from industry insiders.
Economist Tyler Beck Goodspeed argues “that the introduction of regulations and legal restrictions into Scottish banking in 1765 was the result of aggressive political lobbying by the largest Scottish banks.” Such restrictions, Goodspeed shows, “effectively raised barriers to entry and encouraged banking sector consolidation,” which intensified financial instability rather than reducing it.
The lesson from Scotland holds today: As Marshall Lux and Robert Greene of Harvard’s Kennedy School point out, “When regulations—not consumers—drive consolidation, banking system risk increases.”
The imposition of new rules should not be an end in itself, yet that’s exactly how most politicians treat it. Because they’ve made a miscalculation about the effectiveness of the rules they favor, their reflex reaction to any crisis, real or perceived, is to pass a new law and empower regulators.
Wall Street understands this game and plays it skillfully. The largest banks want sterilized competition, competition stripped of its unpredictability, reduced to a small group of large national banks with privileged access to Washington.
In short, genuine free banking would be the worst of all possible worlds for the Wall Street elite, the populist fustian of Senator Warren and President Trump notwithstanding.
David D’Amato, an adjunct law professor at DePaul University, is a policy advisor at the Heartland Institute.
The views expressed by contributors are their own and are not the views of The Hill.