Left and Right Can Agree: Big Banks Undermine Capitalism

Can we save finance from the bankers, and capitalism from the capitalists?

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David Brodwin is a cofounder and board member of American Sustainable Business Council. Follow him on Twitter at @davidbrodwin.

This week, JPMorgan Chase found itself in even more hot water with federal regulators and investigators, including the F.B.I., the Securities and Exchange Commission (SEC), and the Federal Deposit Insurance Corporation (FDIC). The bank and its CEO and Chair, Jamie Dimon, are under investigation for a broad range of misconduct, including abusive mortgage foreclosures, improperly managing a multi-billion dollar trading loss (the so-called "London Whale"), and in the latest round of accusations, failing to alert authorities about suspicious trades by Bernard Madoff, mastermind of the largest Ponzi scheme ever.

Misconduct like this undermines American's faith in businesses and, indeed, in capitalism itself. Now, some free-market theorists are  focusing on the problems presented by institutions like JP Morgan. Their criticism is finding a receptive audience on both the left and the right.

Luigi Zingales, an economist on the faculty at the University of Chicago, is one of the new challengers. To save capitalism, he says, we need to reign in the capitalists. To save markets, we have to limit companies that are so large they can dodge real competition. Zingales' latest book has been praised by conservative Congressman Paul Ryan, as well as liberal economist Brad DeLong.

[See a collection of political cartoons on the economy.]

According to the new conservative critics, the main threat to a true market-based economy is the high degree of influence (some would use the word "corruption") between powerful companies (and their CEOs) and government entities. Nowhere is this more evident than the case of JPMorgan Chase and other "too big to fail" banks.

Conduct that is clearly illegal goes unchecked because the responsible agencies lack the budget or staffing, or because they are blocked by political influence from discharging their responsibilities. On the rare occasions that regulators actually do something, the result is all too often just a wrist-slap: A small fine, no criminal prosecution, nothing to deter future misconduct.

Part of the problem is the huge amount of money it takes to run for office. No one gets elected to high office without owing many favors. Another part of the problem is the revolving door at agencies; many agency staff, overworked and underpaid, look forward to lucrative jobs in industry after their government service. These staffers hesitate to reach conclusions that would be troublesome for the companies they hope to work for some day.

[Read the U.S. News Debate: Are Banks Becoming Too Big to Jail?]

Economists of both political parties have long agreed that economies with extensive corruption are not efficient and do not grow as they could. But liberals and conservatives differ over what to do about it. Conservatives despair of ever achieving an honest, well-run regulatory system  in government; they call instead for dismantling of such structures. Liberals call for cleaning up the regulatory process and reducing the pressures and opportunities that lead to corruption.

The experience of other countries says a clean-up may be feasible, if we're serious about it. Take Singapore for example. As Prime Minister, Lee Kwan Yew presided over a period of tremendous vitality and economic growth while maintaining an authoritarian political climate. Its GDP per capita now surpasses the U.S.

Lee Kwan Yew recognized the importance of competent and corruption-free regulation, according to Graham Allison, professor at Harvard's Kennedy School, and he took pains to ensure the integrity of the regulatory process. Positions in government policymaking and regulatory bodies were extremely well-paid, and competition for these jobs was fierce among the smartest and most motivated applicants. Only the best and brightest won those jobs. Corruption and self-dealing was, to put it mildly, strongly discouraged.

[Read the U.S. News Debate: Does the J.P. Morgan Loss Prove the Need for Tougher Bank Regulations?]

In the U.S., examples abound of well-connected corporations being able to penetrate the government to purchase favorable treatment and escape real competition. Corn growers win special treatment of ethanol fuel that guarantees them high prices for their crop while doing little for energy security and nothing for carbon emissions. Pharmaceutical manufacturers win a law forbidding Americans from shopping for lower priced drugs overseas. Defense firms win contracts to make expensive and underperforming weapons that no branch of the military actually wants.

Insurance companies win federal subsidies to compete with Medicare, even though they can't match Medicare's low overhead rates and overall efficiency. Big banks win taxpayer-funded bailouts when their speculative bets go bad. And big oil enjoys a subsidy to the effect of $2 to $3 per gallon of gasoline to cover the costs of a military presence in the Middle East. All of these market distortions weaken the economy and divert resources from more productive uses.

The marketplace can only work if the participants in it actually compete. Conservatives and liberals agree on this. Competition brings forth innovation and spurs everyone involved to be as productive and efficient as possible. Unfortunately, our system encourages companies to compete in the Capitol rather than compete in the marketplace. When they win at this, the economy and the public are the losers.

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