The virtues of concentration

On op-ed piece in today’s New York Times the latest source to point out that Canada’s banking system is now the most solid and stable in the world. The reasons: Canada has a very concentrated financial system, which is dominated by just five nation-spanning banks, and one that is tightly regulated. Curiously, as the author, Theresa Tedesco, point out, the Canadian national banking model was inspired by the USA’s own Alexander Hamilton, a centralizer and concentrator from way back.

This confirms a couple of longstanding obsessions of mine. One is that concentrated financial systems are easier to regulate than dispersed ones. This proposition has been partly discredited by the “too big to fail” doctrine, which has prompted some people, even on the U.S. left, to argue that big institutions should be broken up. But the problem is that the U.S. authorities didn’t supervise or regulate, not that Citi or Bank of America got too big. Tedesco recommends using the current crisis to engineer a large wave of mergers, leaving the U.S. with many fewer banks than the 8,305 we have now (by the FDIC’s count). Of course, they’d have to be kept on tight leashes, but who but a nut would disagree with that now?

And the other is that concentrated ownership structures, of banks as well as corporations (something that’s true of Canada), are far more compatible with social democracy than dispersed ones. Concentration can lead to greater stability and a lessened role for competition. Canada has a national health insurance system that many Americans envy (along with many other social benefits), a lower poverty rate, and a far more egalitarian distribution. The same can be said of Sweden, which is also highly concentrated and has even better income and poverty stats than Canada.

It’s extremely disreputable to say these sorts of things on the American left, especially its populist branches. For populists, Hamilton is the spawn of the devil, and giant banks are instruments of Satan. But the populist vision is one where everyone owns a small business and credit is practically free. For those of us interested in creating a civilized welfare state in the U.S., and taming the war of each against all ethic that governs American economic life, chucking that populist nonsense and embracing a little concentration could be a good start. Of course, concentration itself won’t take us in that direction. But fragmentation virtually guarantees that we won’t even get a start.

14 Comments on “The virtues of concentration

  1. “Of course, they’d have to be kept on tight leashes, but who but a nut would disagree with that now?”

    What is the evidence of that actually happening, as opposed to being ever inevitable, but forever in the future? As Daniel Davies said:

    “[I]f you look at everything through Public Choice Economics-coloured spectacles you’re going to end up with a very strange and very incorrect view of the world. But it’s a good idea to put on those spectacles once in a while. One shouldn’t underestimate the influence of pure and simple careerism on an awful lot of those strange political trends and schemes which appear to have inexorable momentum despite the fact that nobody seems to want them.”

    Replace “careerism” with “crony capitalism,” and it seems a decent fit for the mess we’re in.

  2. Ha-Joon Chang says some similar interesting things about Hamilton in his useful book, _Bad Samaritans_. He says Hamilton knew that capitalist take-off requires strong protectionism and state planning. Chang’s thesis is that we now deny that universal fact because our overclass wants to kick away the ladder for the Third World.

    Chang doesn’t deal with the ecological limits to growth, but it’s a fascinating and important point.

    P.S. Chang’s chapter on the non-role of culture in economic development is one of the best things around, a powerful antidote to modernization theory dogma.

  3. Canadians different lifestyles are more attributable to acts of government than bank concentration. Unless you think that if we concentrate our US banks we’ll suddenly stop wasting so much money on defense.

  4. I think in the current context, I agree with your comments and think centralization is a more desirable route than anything coming out of the two parties at the moment. But there we others before us who declaimed against “populist nonsense” and wanted a “civilized welfare state.”

    The financial crisis of 1907 and the Pujo Committee brought calls for reform and regulation during the progressive era too, both from an outraged public and from bankers themselves. What did we get? The Federal Reserve Act, which centralized banking and shored up Wall Street’s reign and, as Carter Glass put it, didn’t impair “the rightful prestige of New York” as a “financial metropolis,” but rather confirmed its “distinction, and even hoped to assist powerfully in wresting the scepter from London and eventually making New York the financial center of the world. . . . we may point to the amazing contrast between New York under the old system in 1907, shaken to its very foundations because of two bank failures, and New York at the present time, under the new system, serenely secure in its domestic banking operations . . . .” That’s worked out well.

    No doubt finance was a mess in the US before the Federal Reserve, but I’m not quite ready to chuck the populist nonsense yet when some charismatic leader starts talking about corporate responsibility, ” New Freedom,” “Hope and change,” regulation by “experts,” etc.

    And considering who’s running the treasury and White House economic teams at the moment (Summers, Geithner, et al), to expect any centralization of banking and/or nationalization to result in investors and financiers being “kept on tight leashes,” that is, responsive to democratic appeals, seems highly dubious to me in the current context, especially when you consider how the history of centralization and federal supervision has faired in previous attempts. I guess I don’t find the populist nonsense quite as nonsensical as you do yet.

  5. Hi Doug,

    I would suggest you stop looking at concentration as the key.

    you would be better to bark up the tree of mortgage regulations in Canada.

    1) All mortgages without a 25% down payment need federally mandated public insurance. The rest are de-facto guaranteed by the 25% of skin in the game.

    ****2) In Canada if you buy a house for 300,000 and walk away and the bank sells it for 200,000 you owe the bank 100,000.

    3) Interest on mortgage payments is not tax deductible.

    What still needs to be explained is why Canadian banks did not go all in on US sub-prime. The Caisse de depot did and lost 25% of its capital. A major scandal in Quebec impacting pensions, public auto insurance etc., etc.,. I bring this example up because Caisse de Depot is the defacto national bank of Quebec and dominates as behemoth. So much for concentration being the key.

  6. Travis, I’m not arguing that concentration is *the* key. I am arguing that it’s important. As is dispersion in producing the opposite of social democracy.

  7. Also, the Canadian banks seem content to make profits from soaking their retail customers.

  8. As a longtime semi-sychophant, I wish Doug would have written this as an op-ed piece. In the NYT. Come, let us leave the desert.

    Not that I necessarily agree with the virtues of a more concentrated financial sector. Ownership is already concentrated. Finance is already de facto concentrated inasmuch as the bottom 7,800 banks don’t matter – they’re already regulated and probably more so than the top ranks. I’m pretty sure most populists restrict their infatuation with the soil to gardening, so their yeomanship does extend much beyond a Rodale subscription. The dangers of an even more intensified corporatist structure – fewer hands, greater range of power – seems risky. And what are we to do with the hundreds of thousands of surplus managers, technical, professional, and clerical workers? Adding even more Americans to the ranks of the capitalist surplus population won’t make you many friends.

  9. I’d like to second that comment by Mark S. The “benefits” of concentration are hard to see when you’re getting bled, transaction fee by transaction fee. One figure I heard on TV a while ago was that Canadian banks make 35% of their profits from services to small depositors. The cushion this provides goes a way in explaining why they have been more stable than American banks.

    And while in theory, bigger is easier to regulate, in practice Canadian banks have been complaining that they are too SMALL, saying they need less regulations so that can grow and become “globally competitive”.

    As for the relationship between social democracy and financial sector concentration, you may have a point about correlation, Doug, but I don’t think you’re right about causation. Concentration seems like a natural market response to the “rigidities” that social democracy introduces. But concentration as a first step towards social democracy? I’m still waiting to see bankers marching under the red flag . . .

  10. Bank fees are pretty small change, really. And they’re not low in the U.S. either Citibank charges $3 for an ATM withdrawal if you’re not a customer. And since my own bank, Chase, charges $2 for an ATM withdrawal from a non-Chase machine, that’s $5. I doubt CIBC charges more than that.

    And I do have to wonder whether the Canadian dissenters read this part of the post: “Of course, concentration itself won’t take us in that direction [of social democracy]. But fragmentation virtually guarantees that we won’t even get a start.” So the image of bankers marching under a red, or pink, flag has nothing to do with anything.

  11. By a rough calculation, a little less than 20% of Royal Bank of Canada’s liabilities are in personal banking deposits. It was my impression that the separation of commercial and investment banking meant that a lot of the banks going under weren’t ones that dirtied their hands with such lowly activities. Am I mistaken?

    Here in Canada we’ve seen much the same as in the US over the last 30 years: attacks on unions and retrenchment of social provision. And the concentration of banking has gone along with it.

    But it’s important to see that concentration is compatible with moving away from social democracy. And whille you say concentration won’t work on its own, your second to last paragraph certainly seems to imply otherwise, as if these benefits came from concentration rather than the struggles of working people.

    If your point is to shut up the populists fine, I stand by my correlation not causation argument, since “embracing a little concentration” seems to take us away from what we should concentrate on.

  12. Pingback: ‘When all the work that needs to be done is listed, the notion of mass unemployment makes little sense.’ « up/down cuts ice when it’s thin

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