August 1, 2012

Large Banks do Not Work

The quote below sounds like it was written by a lobbyist for the banking industry.

"A bit of recent history: none of the institutions that toppled like dominoes in 2008 — the investment banks Bear Stearns and Lehman Brothers, the mortgage-finance giants Fannie Mae and Freddie Mac, the insurance company American International Group — were commercial banks." Regulate, Don't Split up Large Banks, New York Times, July 31, 2012

That is because they were bailed out and not prosecuted for their wrong doing. Further, and maybe more importantly, they are oligopolies that hinder competition and take advantage of their control of the industry. The five largest banks in the country have more assets than the GDP of our nation. With that kind of size and power, it is naïve to think they cannot effect the price and quality of services and interest rates offered to the public. It allows them to be less efficient than if they had to compete in a free market.

Another result of free markets would be salaries of the top executives and board members would be lower because of the need to keep costs down to fight off competition.

The quote below is from the book Capitalism and Freedom written by Milton and Rose Friedman. Dr. Friedman is the economist who is quoted most often when conservatives are praising free markets and capitalism.
"But we cannot rely on custom or conscious alone to interpret and enforce the rules; we need an umpire. These then are the basic roles of government in a free society; to provide a means where we can modify rules, to mediate differences among us on the meaning of rules, and to enforce compliance with the rules on the part of those few who otherwise would not play the game."
The best regulator of free markets is free markets. If they are working properly, competition will require the bank be managed efficiently, the best products offered to the consumer, at the lowest price possible. The industry, like all industries, needs a referee. This is especially true in banking since they hold our money and have a huge effect on the total economy if they fail. This is the role of government; make sure that all banks are playing by the rules when they are competing against others in the industry.

Regulators cannot keep pace with free market entrepreneurs and technology. Other entrepreneurs can. You are giving regulators too much credit if you think they can stay ahead of the industry. New regulation tends to be created after the fact; after the cat is out of the bag.

Yes, everyone missed the housing bubble coming, except maybe Goldman Sachs, and guess what; we will also miss the next one. The market is always ahead of regulators. The Glass-Steagall Act should be updated and banks should not be allowed to be too big to fail. More

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