Once again I venture to comment on an economics issue. Beware.
In today’s Times we learn that Henry Paulson will be using some of our money (well, lots of our money) to facilitate bank mergers. (U.S. Is Said to Be Urging New Mergers in Banking) While I understand that some banks are in bad shape, I can’t help but doubt that creating ever larger, and ever fewer banks is the way to go. I know that this is an attractive thing to folks like Paulson, who love capitalism as long as they can monopolize it, but what’s in it for us.
Our present crisis was caused in great part by the fact that mortgage lending was in the hands of fewer and bigger players. It is extremely doubtful that we would have had this mad lending spree were we back in the days of many small banks that knew their communities and actually had an interest in making sure that loans they made were repaid. Were we still in such an environment there would be fewer institutions that were “too big to fail” and this crisis may not have grown so big so fast.
If the end result of all this is even fewer, yet ever larger, institutions, what happens when the inevitable happens: the Republicans return to power, they abandon or ignore regulations, and Wall Street goes wild again? If we only have a few banks, a failure of any one will be monumentally significant. Aren’t we setting ourselves up for an even bigger hit in the future?
Finally, giant institutions tend to acquire inordinate political power. it’s not like banks have had a really tough time making their voices heard, but if there are only a few of them, just as there were only a few investment banks (now there’s almost none) then each of those institutions will wield enormous political power. It hardly needs saying that such power will not be wielded in the public interest.
The Times article raises a number of questions. For instance, it states:
Providing capital to help facilitate a merger, officials say, is also a way to track how the capital is used. Some analysts have questioned how much control the government can exert over its investment, when it is injected into banks in return for nonvoting preferred shares
Talk about a false choice. It’s probably true that forcing a specific action gives you more control than simply buying nonvoting stock, but that’s a choice we didn’t have to make. Nothing is stopping Paulson from taking voting shares, except his own desire to shower money on his old friends.
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