If we were to boil the financial crisis down to its root cause, we could sum it up with former Supreme Court Justice Louis Brandeis’ phrase, the "curse of bigness.” The crisis was caused by massive industry consolidation, which leads to destructive corporate behavior because the decision-makers at these vast institutions are so far removed from the impacts of their decisions.
Perhaps the best way to understand the problems inherent in an economy that separates actions from consequences is to look at its opposite. Last fall, not long after Lehman Brothers collapsed, I was speaking on a panel alongside a community banker. His bank, he said, did not offer mortgages that people could not afford, or that would balloon in cost a few yeas out, for two simple reasons. One was that the bank did not sell mortgages to Wall Street, but kept loans on its own books. The bank's financial well-being, therefore, was directly tied to the well-being of its customers. The other reason was that he invariably knew or got to know the borrowers. "I don't relish the idea of foreclosing on a family I regularly see at the grocery store," he explained.
Arguably even more troubling than the financial crisis itself has been the government response. So far it has resulted in even greater concentration, as failing banks have been ushered into shotgun marriages with other banks, while massive injections of public money have enabled giants like Goldman Sachs to speculate their way into even bigger profits. In the U.S., just four banks now control half of all bank assets, issue half of all mortgages, and account for two of every three credit cards.
The only reasonable path forward is that banks that are Too Big to Fail must be deemed Too Big to Exist and broken up into smaller components more responsive to their communities and customers. We must place strict caps on the market share that any one bank can amass, and we must reinstate rules adopted during the Great Depression—and foolishly discarded a decade ago—that prevented banks from engaging in both ordinary retail banking and speculative investment.
Because the deference to bigness that guided policymakers' response to the banking crisis has long infected our government, banking isn’t the only industry cursed by bigness. A generation ago, we dismantled anti-monopoly laws based on the belief that bigger is more efficient. Competition policy became concerned solely with short-term impacts on prices, abandoning any consideration of the corrosive long-term consequences of concentrated power.
Regulators have been especially blind to the problems caused by firms that exercise their power to gut suppliers and destroy smaller competitors. Thus we have the unchecked growth of Tesco, which now occupies one-third of the British market, and Wal-Mart, which captures nearly one in four dollars Americans spend on groceries and is the largest seller of a staggering array of goods, from toys and clothing to books and home furnishings.
These power buyers now control so much of the market that suppliers have only two options. They can shun them and try to survive by selling to a shrinking number of other retailers. Or they can submit themselves to the chains, which will lead to more revenue but ever thinner profit margins—to the point that there's not a dime left for product development and innovation, much less for taking care of their employees. Of Wal-Mart's top ten suppliers in the mid 1990s, four have sought bankruptcy protection, while others have merged in desperate bids to stay afloat.
All of this led to a profound loss of economic flexibility as the entire global system of production is refashioned to serve Wal-Mart and Tesco. The food, drugs, clothing, and other goods we rely on are now made in a relatively small number of places and transported over long and highly centralized supply lines. As Barry Lynn has written, we are "slowly freezing our economy into an ever more rigid crystal … that every day is more liable to collapse from some sudden shock."
Given the ecological challenges we face, we can ill afford an economy that is the biological equivalent of a monoculture. We need the inherent creativity and adaptability of a multitude of small-scale enterprises that can evolve quickly and better respond to the unique circumstances of their own regions. Competition policy must embrace diversity as its primary aim.
This is an excerpt of a lecture delivered at the Bristol Schumacher Conference in Bristol, England. Full citations available .
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