Monday, May 4, 2009


James Kwak has hit the nail on the head.  Banking as such offers very little in terms of economies of scale.  You need more branches, more loan officers, more risk officers, and just about more everything to make more loans.  On top of that, being bigger doesn't even allow you to charge higher rates or control pricing, because at bottom you are still just one supplier of the ultimate commodity.

Bank lobbying, however, is both imminently scalable and provides a durable competitive advantage to the first movers, given the complexity of the rules and the centralization of the relevant decisions makers.  The capture of the regulatory apparatus is the natural outgrowth of capitalism, and the exact opposite of a market economy.

The great corporations which we have grown to speak of rather loosely as trusts are the creatures of the State, and the State not only has the right to control them, but it is duty bound to control them wherever the need of such control is shown.

Theodore Roosevelt, "Address at Providence," 1902 (emphasis added)

By "creatures of the State," Roosevelt meant not that corporations were created by the state, but that their existence and power existed because of and in concert with the state. A few years ago, someone reading this quotation would have probably thought first of Halliburton; today, it evokes the large banks that are too big to fail.

That quotation was pointed out to us by Zephyr Teachout, a law professor at Duke, who has been proposing new antitrust laws aimed at reducing the political power of large firms.

Teachout's response is clear: write new laws. In particular, she argues, existing antitrust law does not address the problem of political influence.

There are many reasons a "too big to exist" conception of antitrust law makes good sense for a democracy. Perhaps most importantly, large companies have proven to have disproportionate power over the political process. Concentrated financial power often leads to concentrated political power; if you have a lot of cash, one of the most efficient uses of it to maximize profits is to petition the government to change the rules in your favor. Economies of scale might work all too well when it comes to influencing government.

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