TBTF – A Perversion of Capitalism?

Along with the lack of any significant criminal prosecutions, the continued existence, indeed further consolidation of, TBTF (Too Big to Fail) institutions remains one of the more maddening legacies of the global financial crisis.  TBTF status, which justified the enormous bailouts and subsidies given to financial institutions deemed too systemically important to be allowed to fail, remains in full effect.  It remains a tool large financial can use to gain a competitive advantage over other banks not large enough to be deemed TBTF and to push off the cost of any future disasters their speculation causes onto the tax payers again.  New York Times columnist Gretchen Mortgenson discussed this recently on Bill Moyers.

So what to do?  A while back I had read somewhere about a paper put out by the Federal Reserve Bank of Dallas on ending TBTF, it’s titled “Choosing the Road to Prosperity : Why We Must End Too Big to Fail -Now” .  I’d intended to read it for some time but kept finding better, more useless ways to spend my time.  Recently I got around the reading the thing.  I quickly grew bored.  It’s not long, about 25 pages of fairly sparse writing padded out with pictures and graphs.  The steady, milquetoast prose wasn’t exactly a surprise, but did justify my lengthly procrastination.  Prominent is a running technocratic discussion of the “engine” of monetary policy, complete with strained analogies like the misfiring piston of bank loans, or problems with bank capital “lubricant”.

Well and good enough, though I’m unimpressed with mechanistic analogies related to the economy, with gauges and clearly defined buttons and levers to be pushed and pulled, resulting in clear and predictable outcomes.  But the paper became truly irritating with a side-bar titled “TBTF” A Perversion of Capitalism”.  The section frets about the erosion of faith in American capitalism caused by the TBTF phenomenon, listing three “basic tenants” of Capitalism that TBTF supposedly vioaltes:

  • Capitalism requires the freedom to succeed and the freedom to fail
  • Capitalism requires government to enforce the rule of law
  • Capitalism requires businesses and individuals be held accountable for the consequences of their actions

What these holy tenants of Capitalism represent is some ridiculous, perfect Platonic Form version of Capitalism.  It’s bullshit.  If Capitalism is about competition, and I hear that it is, far from being a perversion, becoming TBTF is the most natural goal there is.  Firms didn’t become TBTF because they liked the acronym, or didn’t understand the rules of capitalism.  They grew so large because that gave them a competitive advantage and provided a huge safety net for any missteps they made.  The paper mentions the “creative destruction” of Capitalism several times.  The creative part is nice, but the destruction part isn’t as much fun.  And a destruction, mind you, that the paper admits could be the result of  nothing more than simple bad luck  (not outdated products or mismanagement).  If you could shield yourself from the “destruction” side of that equation, wouldn’t you?  Perhaps you could say the success of such an effort was a “perversion” of some idealized capitalism, but it would only be a natural response to a capitalism as practiced in the real world.

Because an even playing field might be fine if you’re playing a game of Monopoly with the family, or a game of checkers with your nephew, but it becomes much less appealing when the stakes are raised.  If you were flipping a coin for a million dollars, and you could make the rules, would it be unnatural, or surprising, if you came up with “head I win tails you lose”?  No one is really looking for a “fair fight”.  Not really.  Not if we can help it, anyway.  No general, who isn’t a moron, is going to seek to engage the enemy on terms that aren’t advantageous to his die.  NFL teams play the regular season trying to gain home field advantage during the playoffs because it is just that, an advantage.  So it goes with war and sports, so it goes with economic competition.

The Fed paper essentially acknowledges all this, in an early section on the “flaws” that led to the TBTF problem titled “Concentration”:

In the financial crisis, the human traits of complacency, greed, complicity and exuberance were intertwined with concentration, the result of businesses’ natural desire to grow into a bigger, more important and dominant force in their industries.

But this sentiment is contradicted later by the claim that “concentration in the financial sector is anything but natural.”  It is only “artificial” advantages that have allowed banks to grow so large.  It would be difficult to argue what would be more natural, in a competitive, capitalist situation, than for financial institutions to concentrate in order to gain more power and advantages.

Unless markets are magic, and I haven’t seen any evidence to suggest that.  I’m convinced that when some future archaeologists pick through the rubble of our civilization, they’ll look at our present economists and their reverent invocation of “the market”, that invisible hand that justly allocates goods, the same way we look at some shaman in a benighted part of the world entering the spirit realm.  Whatever else is there, there will be some pitied bemusement.  For isn’t all the talk of austerity, really, a call for some to sacrifice to propitiate an angry and vengeful god?

How can one not see the religious, fetishistic way the idea of the market is approached when reading a line like: “Human weakness will cause occasional market disruptions.”  Witness the odd suggestion of the “market” as some sort of perfect ideal existing separately from humanity, a Garden of Eden before Adam and Eve.  It is only the weakness, the sin, of humans that blight the otherwise pristine “market” with disruptions.

To give the paper its due, it does reward reading to the end.  I wouldn’t have thought that a Fed paper would use the phrase “oligopoly power”, but sure enough:

The TBTF survivors of the financial crisis look a lot like they did in 2008.  They maintain corporate cultures based on short-term incentives of fees and bonuses derived from increased oligopoly power.

And then the paper explicitly calls for breaking up the biggest banks into smaller units.  Will it be easy?  Nope, to state the obvious, the power TBTF institutions have managed to accrue to themselves due to their market dominance makes then hard to bring to heel.  As the paper puts it:  “…the political economy of TBTF suggests that the big financial institutions will dig in to contest any breakups.”  How do we break them up?  The paper doesn’t get into that…though there are legislators trying to do it through the law.  What is clear is that TBTF won’t end by praying to the “invisible hand’ to come down and cleanse the human stain from the Market.

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