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.