[Marxism] The Chicago School economists on what to do with the big banks

Shalva Eliava shalva.eliava at outlook.com
Sat Apr 30 10:04:23 MDT 2016

I've been reading Gar Alperovitz's What Then Must We Do? and was pretty intrigued by his chapter on what to do with the banks. He cheekily calls upon the authority of the old Chicago School economists to make the case for turning the big banks into public utilities:

Big banks like JP Morgan Chase, Bank of America, Wells Fargo, Citigroup, and Goldman Sachs are simply way too powerful to be systematically regulated. For one thing, the amount of money they spend on lobbying and politics is stupendous. The year Dodd-Frank was passed, the FIRE sector (finance, insurance, and real estate) spent more than $475 million on lobbying. This was followed up the next year, 2011, with just under $480 million. That’s almost a billion dollars’ worth of high-priced lobbyists who do nothing but try to write loopholes into the law – and this is for only two years. 

Senator Dick Durbin is blunt: “The banks…are still the most powerful lobby on Capitol Hill. And they frankly own the place.” 

…So the question is this: What happens when the next big crisis explodes and we afgain have to face the impossibility of regularting banks that too big to fail – banks that, when they topple, can bring down the entire system? 

The current nostrum – partially provided for in the Dodd-Frank legislation under certain circumstances, and promoted generally by a wide array of commentators and politicians – is: “Well, let’s break them up into smaller banks!” 

Yet we only have to look as far as the history of banking, on the one hand, and of anti-trust law, on the other, to see that even when break-them-up efforts occur (which is rarely), the big fish tend to find a way to eat the little fish, and in due course we’re back where we started. 

Take a look, for instance, at how fast bank concentration developed in recent years. The average size of US banks increased fivefold (measured in inflation-adjusted total assets) between 1984 and 2008, and the number of banks, correspondingly, dropped by more than 50 percent – from over fourteen thousand to barely seven thousand. In 1984, for instance, forty-two different banks held 25 percent of all US deposits.  By 2012 one-tenth that number – the top four (Bank of America, JPMorgan Chase, Wells Fargo, and Citigroup) – held far more: 36.6 percent of all deposits.  

The power of big fish in general to regroup is hardly restricted to banking. When Standard Oil was broken up in 1911, the immediate effect was to replace a national monopoly with a number of regional monopolies controlled by many of the same Wall Street interests. Ultimately, the regional monopolies regrouped: In 1999 Exxon (formerly Standard Oil Company of New Jersey) and Mobil (formerly Standard Oil Company of New York) reconvened in one of the largest mergers in US history. In 1961 Kyso (formerly Standard Oil of Kentucky) was purchased by Chevron (formerly Standard Oil of California); and in the 1960s and 1970s Sohio (formerly Standard Oil of Ohio) was bought by British Petroleum (BP), which then, in 1998, merged with Amoco (formerly Standard Oil of Indiana). 

The tale of AT&T is similar. As the result of an antitrust settlement with the government, on January 1, 1984, AT&T spun off its local operations so as to create seven so-called Baby Bells. But the Baby Bells quickly began to merge and regroup. By 2006 four of the Baby Bells were reunited with their parent company AT&T, and two others (Bell Atlantic and NYNEX) merged to form Verizon. 
So the hope that you can make a banking break up stick (even if it were to be achieved) flies in the face of some pretty daunting experience. 
...Interestingly, the conservative founders of the Chicago School of Economics understood better than most liberals and progressives the general logic at work in situations involving really large and powerful corporate institutions. Even as the latter kept urging regulation or breakups, leading economists like Henry S. Simons cut to the heart of the matter. 

For one thing, Simons and his colleagues were clear about the economics involved. “Few of our gigantic corporations,” he wrote, “can be defended on the ground that their present size is necessary to reasonably full exploitation of production economies.” 

For another, they knew that the big fish could easily manipulate the regulators. Chicago School conservative and Nobel laureate George Stigler, for instance, demonstrated how regulation was commonly “designed and operated primarily for” the benefit of the industries involved. Numerous conservatives, including Simons, concluded that antitrust break-them-up efforts could also easily be managed by large corporate players – a view conservative Nobel laureate also came to a few years later. 

Simons – Friedman’s revered teacher, and one of the most important leaders – did not shrink from the obvious conclusion: “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 Great Depression, eight major Chicago School conservative economists (including Simons and Frank H. Knight) also put forward a “Chicago Plan” that called for outright public ownership of Federal Reserve Banks, the nationalization of money creation, and the transformation of private banks into highly restricted savings-and-loan-like institutions.

The thing about a powerful logic of the kind the old conservatives so clearly understood is that it has a way of simply not going away. Quite likely we shall go through a number of rounds of crisis, partial crisis, attempts at regulations – maybe even some break-up-the-big-banks efforts.

Almost certainly, however, the underlying institutional power, and the logic it generates, will continue, with three all-but-certain results.

First, at some point we will really “get” that the Chicago argument is correct. Like it or not, regulation doesn’t work in these situations. The big guys will capture the regulators. 

Second, at some point we will really “get” that breaking up the banks also doesn’t work. The slightly slimmed-down big guys will fatten up quickly by eating up the little fish, and we will be back to square one. 

Which – third – logically means that if we want to stop the crises, at some point, there is only one thing left: Take them over; turn them into public utilities. 

…[T]he convergence of bank-created crises and public pain and anger – together with the truth of the Chicago School logic – points to only one logical outcome: like it or not, some form of public takeover. If this sounds unlikely to you at the moment, consider the following:

- There is already lots and lots of public and cooperative banking going on in these United States. Unknown to most Americans, there have been a large number of small- and medium-sized public banking institutions operating for a long, long time. They have financed small businesses, renewable energy, co-ops, housing, infrastructure, and other specifically-targeted areas. As we have seen, there are also just under seventy-two hundred community-based credit unions with more than $1 trillion in total assets. Further precedents for public banking range from Small Business Administration loans to the US Export-Import Bank to the activities of the US-dominated World Bank. In fact, the federal government already operates around 140 banks and quasi-banks that provide loans and loan guarantees for an extraordinary range of domestic and international economic activities. 

- We’ve long been told, and often believed, that the free-market operation of big banks benefits us all. But a number of people increasingly recognize that the emperor has no clothes – and they are beginning to state the obvious, even though the press doesn’t often cover it. Here’s the chief economist of Citicorp no less (just before he got his job): “Is the reality…that large private firms make enormous private profits when the going is good and get bailed out and taken into temporary public ownership when the going gets bad, with the tax payer taking the risk and the losses? If so, why not keep these activities in permanent public ownership?” 

So, for those of you who understand that we face a systemic crisis, not simply a political crisis, there are two things to do. The first should be self-evident from the above: Begin to be as up-front in your discussion, advocacy, and analysis as the old conservatives and the chief economist of Citicorp. It’s time simply to tell the truth. The really big banks need to be taken over before they really crash the system – the sooner the better. [pp. 76-81] 

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