Enforce the Sherman Anti-trust Act and Regulate the Shadow Banks

I’ve said this before, but it bears repeating.  Monopoly power and rent-seeking behavior are anathema to market systems. Politics should stay out of economic decisions and government should provide the framework that makes the market honest, transparent, and open to all interests.  Republican and Democratic pols need to go back to Principles of Microeconomics classes and learn their market structures because protecting a market where there is already intense concentration without additional transparency and regulation is a recipe for disaster.   David Kay, in a column at the FT,and Mark Thoma  of Economist’s View raise the generic  issue again. I’m all for them.  I’m looking at it from the eyes of a financial economist however on the advent of new financial regulation. The rent-seeking has gotten so bad there that they’ve sent Fed Chair Ben Bernanke back to school for a lesson on politics.

Let’s start, like any good lesson, from the theory.

This is from David Kay.

Control of rent-seeking requires decentralisation of economic power. These policies involve limits on the economic role of the state; constraints on the concentration of economic power in large business; constant vigilance at the boundaries between government and industry; and a mixture of external supervision and internal norms to limit the capacity of greedy individuals in large organisations to grab corporate rents for themselves. Vigorous pursuit of these is the difference between a competitive market economy and a laisser-faire regime, and it is a large difference. …

[T]he scale of corporate rent-seeking activities by business and personal rent-seeking by senior individuals in business and finance has increased sharply.The outcomes can be seen in the growth of Capitol Hill lobbying and the crowded restaurants of Brussels; in the structure of industries such as pharmaceuticals, media, defence equipment and, of course, financial services; and in the explosion of executive remuneration.Because innovation is dependent on new entry it is essential to resist concentration of economic power. A stance which is pro-business must be distinguished from a stance which is pro-market. In the two decades since the fall of the Berlin Wall, that distinction has not been appreciated well enough. … The essence of a free market economy is not that the government does not control it. It is that nobody does.

Mark Thoma had some additional analysis.

Free markets – where free simply means minimal government involvement – are not necessarily the same as competitive markets. There is nothing that says what many interpret as freeing markets – lifting all government restrictions – will give us competitive markets, not at all. Government regulation (as well as laws, social norms, etc.) is often necessary to help markets approach competitive ideals. Environmental restrictions that force producers to internalize all costs of production make markets work better, not worse. Rules that require full disclosure, or that impose accounting standards help to prevent asymmetric information improve market outcomes. Breaking up firms that are too large prevents exploitation of monopoly power (or prevents them from becoming “too large to fail”) which can distort resource flows and distort the distribution of income. Making sure that labor negotiations between workers and firms are on an equal footing doesn’t move markets away from an optimal outcome, just the opposite, it helps to move us toward the efficient, competitive ideal, and it helps to ensure that labor is rewarded according to its productivity (unlike in recent years where real wages have lagged behind). There is example after example where government involvement of some sort helps to ensure markets work better by making sure they are as competitive as possible.

Thoma’s comments are pure economics professor.  Market failure is not always the result of government overregulation, taxation, and all those nasty things that Voo Doo economics assumes. Yes, ghost of  Ronnie, government can be the friend of the market and is not always the problem.  Market failure can come from market concentration and lack of transparency as well as two frictions I’ve harped on continually.  That would be hidden information and other forms of information asymmetry that create markets characterized by malfeasance by agents.

Government can be an important actor in smoothing out the glitches that arise from many of sources of frictions.  We have laws that have been in place for many years to do just that.  One of the oldest and most potent is enforcment ofthe Sherman Anti-trust act which seems to have all but been taken off the list of the Attorney General’s priorities. So much systemic risk these days in the financial markets is coming from the intertwining of huge operators that simply busting up the biggest operators into regional players would make sense on so many levels.

This especially applies to the Financial sector as it exists now.

Complete misunderstanding of the Federal Reserve and an inability to keep their hands off yet another area where politics should be kept to a minimal has me supremely worried.  Senator Dodd, holder of a mortgage granted under special consideration and asleep at the wheel over the last few years while Wall Street arbitraged its way to a financial crisis, just put forward an act to consolidate a fiefdom for the Banking Committee he chairs.  It has some lofty goals that look like they’re trying to solve the problems of a concentrated, barrier filled market with a need for additional regulation and transparency.  However, it appears to be  layered within an uberagency that looks way to vulnerable to the political.

On Tuesday, a new threat opened up: Senator Christopher J. Dodd, chairman of the Senate Banking Committee, declared that the Fed had been an “abysmal failure” at regulation. He introduced a bill that would strip virtually all of its power to regulate banks, including financial institution considered too big to fail.

There will be a fight. Mr. Bernanke and the Fed has powerful political supporters, from lawmakers like Mr. Frank and President Obama. But the Fed chairman is being forced to nurture those ties as never before and to carefully map out which battles are worth fighting.

“Ben Bernanke turns out to have better political instincts than anybody thought,” Mr. Frank said in an interview last week. “They accept the fact that I know what I’m doing up here.”

On one front, the Fed faces populist anger from both left-wing Democrats and right-wing Republicans about its power and secrecy. At the same time, officials are locked in brutal but arcane battles about who should oversee Wall Street and big banks as Congress tries to pass a sweeping overhaul of financial regulation.

Congress, ever the finger-pointer, will find the Fed a convenient scape goat.  That is not to say that the Central Bank has not been without its issues.  It is to say that introduction of congress, its land-o-lawyers and pols, and its inability to just say not to lobbyists (rent-seekers) will not make the Fed more efficient.   Dodd is likely to find an ally in the usual bunch of daft, conspiratorial-bent Republicans.  This quote from the NY times article is mind blowing and a pretty good example of the wholesale ignorance of economics rampant in Washington DC these days.

Senator Jim DeMint, a conservative Republican from South Carolina, denounced the Fed on the Senate floor in July as an “unelected central bank” that enjoyed a “monopoly over the flow of our money” and operated in “almost complete secrecy.”

Jim DeMint obviously needs to go back to school for a Monetary Policy class.  Nearly every one of these statements is either blatantly wrong or completely misconstrues the role and charter of the Fed.  The Fed is not captured by Wall Street.  The Congress is, however, and injecting any of these fools into exchange rate or monetary policy would likely finish off our economy in no time.  Remember, these are the fools that encouraged deregulation of ‘financial innovations’ to begin with.

Here’s the Naked Capitalism short version of the Dodd bill that does contain a lot of good things if they manage to get past K Street.  The purpose of the bill is to supposedly rein in Wall Street and prevent another financial crisis.  These are both good goals.  However, I worry about the creation of this superagency called  the Financial Institutions Regulatory Administration which itself looks like its so big it’s bound to fail and likely to be subjected to the whims of the regulated as well as Congress.  My other question is that if all these other financial institutions are to be brought under this UBERregulator, why have insurance companies been left to the Treasury?  That seems REALLY odd since most insurance companies are now entrusted with a huge number of pension funds so they might as well be considered pseud0-fiduciary institutions.  It just doesn’t make sense to me to drop them there unless there’s something political issue I’m not seeing.

The actual details of the bill, in terms of what they give to the Fed and what they give to the SEC seems about right.  There’s a comprehensive wish list of all kinds of wonderful things that I doubt will actually make it passed the ABA and the Vampire Squid interests, but they can try.  Again, the main problem right now is the heavy concentration, which could be taken care of with enforcement of anti-trust regulation, and the lack of regulation over the Shadow Banking Industry which can be handled by laws granting powers to the SEC.  I just see this bill which is now over 1000 pages long and hasn’t really hit the majority of interests yet as way too much to really accomplish the important things and too widespread to be effective.  It centralizes way too much power into, guess where, the banking committees in congress which really haven’t done a bang up job to date and are way too swayed by their political contributors.  Again, much better to beef up the agencies we have with good transparency and use the monopoly laws we already have on the books than create an entire set of rules and regulations that are going to have to be completely re-worked, re-tooled, and re-fought through the courts.

There are basically two huge goals we should have at this point.  The first is get rid of too big to fail. We don’t need any more  oligopolies in this country.  The second is to better regulate the shadow banking industry and the nonbank banks.  It’s not checking and savings accounts that have problems, it’s the ‘financial innovations’.  This thing seems to be a shot gun approach when a few good snipers are necessary and only seems to extend power into the hands of congressional pols.  But, I’m going to keep an eye on it, believe me and I’m going to take up some virtual ink once I dive into more details.  The Health Plan may have been beyond me, but this thing shouldn’t be at all, so if I can make it through the legalese , I’ll try to keep you up to speed before we’re further indentured to Goldman Sachs and Chase.

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