Can antitrust laws break up big banks?
A congressional committee is discussing criteria to use in determining if a financial institution is too big to fail. Duke law professor Zephyr Teachout talks to Bob Moon about whether antitrust laws can be used to break up the financials.
Zephyr Teachout, law professor at Duke University (dukemagazine.duke.edu)
More on Crime - Law, America's Financial Crisis
TEXT OF INTERVIEW
Bob Moon: As for those economists I mentioned up top? They were talking to another group of lawmakers who were looking at the health of the financial sector today. The Joint Economic Committee in Congress. The focus was size. And what criteria we should use to determine if a large financial institution -- say, an AIG -- is too big to fail. Two notable economist weighed in, as did the president of the Federal Reserve Bank of Kansas City. And they all said we should break up big financials and maybe even use antitrust laws to do it. To talk about this latter point we turn to Zephyr Teachout. She's a law professor at Duke University. Welcome.
Zephyr Teachout: Thank you for having me.
Moon: You know, I have to say that I've been scratching my head for quite a while now wondering why the words antitrust haven't been a bigger part of this two-big-to-fail conversation. Why not, do you think?
TEACHOUT: Historically our antitrust policy is not set up to deal with the kind of financial and political crisis that we have now. That isn't to say it couldn't be. But it's been primarily focused on mergers that threaten the quality of the product and the consumer experience.
Moon: So why not antitrust in the case of an institution, a financial institution, that is said to be too big to fail?
TEACHOUT: Well, several people now are calling for an overhaul of our antitrust framework. Simon Johnson, who was an economist at the IMF and now a professor at MIT, talked about this today in the Congressional hearings. And others have as well. It's a framework that already exists. So if we strengthen those laws, it could be used to break up the existing, if not monopolies, but overly large companies in banking industry and elsewhere.
Moon: So how do you augment these antitrust laws to apply to the banks?
TEACHOUT: You could pass a new act, which would join the other antitrust law acts -- Clayton and Sherman acts. This new law would look at size as an independent variable. That could be a combination of looking at profit, assets or market value but would have a default rule that says no company can become larger than a certain size depending on the industry.
Moon: Well, let me take the other side of this issue. There's an argument that bigger is better when it comes to these financial institutions because they can offer more to consumers and might in the end become more efficient. What do you say to that?
TEACHOUT: Well, if you saw the panel at Congress this morning, the Congressional panel on the economy. There was a consensus that a truly vibrant and stable and innovative economy actually depends upon medium-sized businesses, small businesses, in the banking sector, a mix of medium-sized banks and community banks. That's also true for a vibrant democracy. Now that isn't to say that there isn't going to be some cost, something lost if we create a scale-based antitrust. But I think collectively we're willing to take that risk. Democracy is worth it. And economies of scale which work decently in some areas, in the private market, economies of scale work far too well when it comes to influencing government.
Moon: The difference between economies of scale and economies of over scale, huh?
TEACHOUT: Right. Exactly. There's a wonderful argument out there that a colleague of mine has been writing about. It's not just that these banks are too big to fail, but they're too big to manage by anyone. Too big to understand. And if we don't understand the instruments we've created, well, then we should encourage institutions that we can manage and can understand.
Moon: Zephyr Teachout is a law professor at Duke University. Thanks for you insights.
TEACHOUT: Thank you.
Comments
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From Orange Park, FL, 01/11/2010
History is replete with Laws restricting anticompetitive practices. Indeed we have Anti Trust Laws to deal with the too big to fail scenario which concerns us all. The political will however clearly appears to be lacking to take Anti Trust action although a repeat of the recent bailouts and or the excessive compensation packages may give added impetus to Anti Trust Action
From Dallas, TX, 05/10/2009
Like regulation reform, use of anti trust ultimately takes political will at top levels. I say, go for it, but politics can go only so far to solve this problem. We need grass roots action. Just think of the impact on the "too big to fail" banks if us boomers withdrew our funds did business only with regional and local banks. Is it time for emtrepreneurs to start organizing new local banks? Does anyone remember regional brokerage firms that knew their markets and handled IPOs of local and regional firms? The Repubs are looking for a cause that promotes their so call core values. If they really believe in local control maybe they should lead this charge.
From HI, 04/21/2009
Rip 'm up tear 'm up give 'm hell Duke. . Over scale is hardly scale all in clover. When computers morphed from hard wired with color-coded spaghetti wire covers
through programmable spaghetti code
to today's modular programs featuring reusable modules, reusable headers, reusable libraries, and a text source code riding shotgun, one well known company decided to regress to the good old days. They decided to re-spaghetti their WWW.DOZE.BROWSER back into a Gordian Knot carefully hidden deep within OS code. But their browser was more easily hidden than their intent.
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Integrating many subunits of a business to prevent a more efficiently freely moving subunit from spinning up to the lightning speed of an inner loop is either a poison pill to prevent the top managers on a pyramid from being shrugged off by Atlas himself or to justify delay of anti-trust procedures. The repackaging of the forlorn penny-pinching depositor into the same snake-pit with the Hedge-Fund-Misnomer became Cicero's Republic Betrayed.
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As computers evolve farmers buy complex agri-software that make them suddenly and profoundly aware of just how complex their business module is. Each module of each section of our economy is and should continue to be separate from the consultants who are only that and not another layer of command, not the top management of a conglomerate. Finance works no better as conglomerate than any other type of industry.
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The spaghetti code has crashed once more. A call for help A call for Modular Man
From winston-salem, NC, 04/21/2009
The prof is creating an environment that is way too complicated. Simple principles should apply: (1) very limited types of organizations should be eligible for any type of taxpayer backup; (2) any organization that is subject to such backup must be limited to no more than 5% of its industry, and (3) any such organization must not be diversified in any other industry (except perhaps on a de minimus basis).
Result: we don't have to worry about "too big to fail".
From Madison, WI, 04/21/2009
the operative theory of both democracy and capitalism is not "free market". it is competition. the government's role is to make sure the competition takes place. this is the essence of antitrust laws, which i would assume you have no problem with. nobody complains when the DOJ steps in to make sure there's no collusion in pricing (and yet, the principle of "free market" would have us sit back and watch the strong get stronger). the issue here is not "do you believe in the "free market". let's cut the platitudes. this is a complex problem where big banks might be unhealthy for competition because they can do anything they want (because they know the government can't let them fail).
From roberta, GA, 04/21/2009
If I understand this correctly, professor Teachout believes that government should limit the size of business because "Democracy is worth it." It seems to me that the operative theory of both democracy and capitalism is "free market". We have the freedom to do and think what we desire, and if we are unable to compete in the free market of ideas and action, then we are expected to change. Or disappear (hmmmm...a novel idea). Centralized planning is the death of the very democracy the good professor finds so worthy of "saving".
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