The Conservative Case For Breaking Up The Banks

George Will

George Will

George Will thinks its a good idea for free-market conservatives to support breaking up the banks. In the process he notes the plan comes from from liberal Senator Sherrod Brown of Ohio.

There is no convincing consensus about a correlation between a bank’s size and supposed efficiencies of scale, and any efficiencies must be weighed against management inefficiencies associated with complexity and opacity. Thirty or so years ago, [Ohio Sen. Sherrod Brown (D)] says, seven of the world’s 10 largest banks were Japanese, which was not an advantage sufficient to prevent Japan’s descent into prolonged stagnation. And he says that when Standard Oil was broken up in 1911, the parts of it became, cumulatively, more valuable than the unified corporation had been.

Brown is fond of the maxim that “banking should be boring.” He suspects that within the organizational sprawl of the biggest banks, there is too much excitement. Clever people with the high spirits and adrenaline addictions of fighter pilots continue to develop exotic financial instruments and transactions unknown even in other parts of the sprawl. He is undecided about whether the proper metric for identifying a bank as “too big” should be if its assets are a certain percentage of GDP — he suggests 2 percent to 4 percent — or simply the size of its assets (Richard Fisher, president of the Federal Reserve Bank of Dallas, has suggested $100 billion).

By breaking up the biggest banks, conservatives will not be putting asunder what the free market has joined together. Government nurtured these behemoths by weaving an improvident safety net and by practicing crony capitalism. Dismantling them would be a blow against government that has become too big not to fail.

Will points out that his desire to end “too big to fail” is because of his free-market ideology, not despite it. Free-market advocates do ourselves no favors when we allow massive corporations distort the free-market. In the case of banks, the biggest are actually worth more because the market understands that “too big to fail” ensures the government will need to step in once again when disaster happens.

That only one candidate dared to bring up this issue in 2012, including President Obama, is telling; the lobbying power of Wall Street firms is immense. Jon Hunstman advocated a market based solution to this problem, as penned in a Fox News op-ed. Unfortunately  he believes in evolution, so his chances of making it past the GOP primaries is minimal.

This is a winning proposition for any party with the guts to pursue it. George Will has opened the door for conservatives, let see if they walk through.

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13 Responses to The Conservative Case For Breaking Up The Banks

  1. Too big to fail to too big to exist. I understand the concerns when AIG almost collapsed and many thought it could seriously impact the world economy. So they bailed AIG out. Well it should not have been a bail out it should have been an organized dissolution of AIG. The government should have stepped in and sold off the company in order to cover their obligations and dissolve the company in an organized and methodical fashion so as to avoid hurting the economy. If a company is so big that it is not allowed to fail then it is too big to exist. If a single company can threaten the world economy and it’s own actions led to that threat to the world economy then for the good of the world it needs dismantled.

    Instead what we got was privatized profit and socialized risk. The public took on the risk for AIG yet AIG was allowed to keep the profit from taking the risk. They continued to pay multimillion dollar salaries to top execs even after being bailed out. And now AIG is suing the government because they say stockholders lost money when the government took ownership of part of the company. So not only did they endanger the world economy, they got paid millions of dollars to do so and when we saved their butt they sued the government for it.

  2. Will’s case supports my commentary on another post asserting that the opposition to crony capitalism (i.e. corporatism) is not partisan.

  3. I don’t think Huntsman’s chances are minimal. At least I hope not.

    All I know is that I don’t want to bail anyone out anymore.

  4. Jarret R. says:

    Interesting. You could also have titled this post, “George Will Embraces Fundamentally Liberal Idea.” Lets not forget that Liberalism offers solutions that are beneficial, and these ideas do not necessarily become “conservative” just because someone like Will embraces them. One of liberalism’s best virtues is its recognition that the market works best when it doesn’t constantly collapse on itself.

    On another note, if Will seriously thinks that “Government nurtured these behemoths safety net and by practicing crony capitalism,” than I suspect his is suffering from George Will syndrome. Perhaps it would be foolhardy to remind Will of just who held the reigns of government during the deregulation of the Wall Street banks (hint: it wasn’t just the Republican-lite Bill Clinton), and who was advocating for the benefits of putting social security to the whims of our casino finance system.

    • Jarret R. says:

      ETA: After “safety nets,” should have the words “by weaving an improvident.”

    • You’re right that the idea doesn’t magically become conservative when the right embraces it. I did attempt to ensure everyone knew the idea came he was embracing was Sherrod Brown’s. Even thought the idea is not conservative, Will has given the right the rational to support it, which is more important in my opinion.

      • Jarret R. says:

        Good point. Ideological predilections aside, if an idea works, I say use it! Sometimes the stars align and myself and George Will agree. Who knew…

  5. johnhaskell says:

    Funny to see predominantly fiscal conservatives advocate for anti-cyclical policies, but this, like anti-trust law, points to the counter-intuitive nature of the markets. We want consumers to have choices, and for businesses to compete, innovate, grow, and through that process mega-companies and conglomerates emerge, creating monopolies, reducing consumer choice, and creating massive systemic risk. In other words, what the markets encourage can be their undoing, hence I cannot see a “market based solution.” Huntsmans’ suggestions are analogous to the Austrian School’s proposal of letting the market clear, regardless of the pain incurred. Although prolonged and painful, this recession is moderate compared to the Great Depression, in large part because unlike Hoover, the Fed responded to the problem–despite how AFP and others would like to rewrite history.

    • I appreciate when conservatives are both skeptical of big government and big business.

      I have not gone all the way into the weeds with Huntsmans’ idea. I understand it applies fees when institutions reach a certain level of GDP. Is that your understanding?

      • johnhaskell says:

        No. I completely mistook something else I read for being Huntsman’s idea.

        Although, I still don’t agree with his idea from the article linked–which is basically a Pigouvian tax. Too difficult to measure between private and social cost when we are discussing TBTF. Also, using GDP does not reflect what power a bank (or any entity) has within their market. For example one entity could have 5% of GDP, but if the market it operates within consumer 6% of GDP or 26% of GDP will greatly impact the market power that entity has, and the systemic risk it poses.

      • Not only should assets be consider but also obligations need considered. With AIG much of the concern was over the fact that they would default on so many obligation that it could force other institutions to default and thus cause a domino effect.

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