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The New Republic Raises the Right Questions

February 25, 2010

Read this.

In examining President Obama’s pledge to (finally) take on financial services reform, and Paul Volcker’s prescription for ending too-big-to-fail, Peter Boone and Simon Johnson, writing in The New Republic, take note of something that until now has mostly escaped the notice of us financial commentators: “Market Power.” Consider:

As a result of the crisis and various government rescue efforts, the largest six banks in our economy now have total assets in excess of 63 percent of GDP (based on the latest available data). This is a significant increase from even 2006, when the same banks’ assets were around 55 percent of GDP, and a complete transformation compared with the situation in the United States just 15 years ago, when the six largest banks had combined assets of only around 17 percent of GDP. If the status quo persists, we are set up for another round of the boom-bailout-bust cycle that the head of financial stability at the Bank of England now terms a “doom loop.”

But market power—that is, the ability to impose cartel pricing—is just one facet of the financial system in which we’re all so literally invested:

The banks have the power to preserve this arrangement. While the U.S. financial system has a long tradition of functioning well with a relatively large number of banks and other intermediaries, in recent years, it has been transformed into a highly concentrated system for key products. The big four have half of the market for mortgages and two-thirds of the market for credit cards. Five banks have over 95 percent of the market for over-the-counter derivatives. Three U.S. banks have over 40 percent of the global market for stock underwriting. This degree of market power brings with it not just antitrust concerns, which this administration has declined to act on, and a huge amount of economic risk—but great political influence as well.

As Boone and Johnson conclude, “the Volcker rules are not the answer.” What is then?

It’s hard to read the piece and conclude the answer isn’t, at least, a broad-based popular movement against the financial sophistry that has long passed for innovation. Don’t ask me how such a movement could come about though. I’ve been waiting—and calling—for it since 1988, and no sign yet.

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