Can antitrust laws break up big banks?
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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.
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