This is not really another bailout post; it’s just a short pause to notice something that we should probably think about later, when we have more time and better concentration.
I think it was Groucho Marx who said he wouldn’t belong to any club that would have him as a member. Joseph Heller used the same circular logic to comic effect in Catch-22:
There was only one catch and that was Catch-22, which specified that a concern for one’s own safety in the face of dangers that were real and immediate was the process of a rational mind. Orr was crazy and could be grounded. All he had to do was ask; and as soon as he did, he would no longer be crazy and would have to fly more missions. Orr would be crazy to fly more missions and sane if he didn’t, but if he was sane he had to fly them. If he flew them he was crazy and didn’t have to; but if he didn’t want to he was sane and had to. Yossarian was moved very deeply by the absolute simplicity of this clause of Catch-22 and let out a respectful whistle.
“That’s some catch, that Catch-22,” he observed.
“It’s the best there is,” Doc Daneeka agreed.
In much the same way, it seems to me there is something at least paradoxical, and perhaps self-contradictory, about spending unprecedented amounts of public money to shore up institutions so large that in better times we would rather have expected to see them get attention from antitrust authorities. Now, the government not only permits mergers between gigantic banks; it demands them.
How do we explain the paradox? The standard narrative might be that the banks really did get “too big to fail,” and that perhaps we should have kept them from getting so big but that’s water under the bridge now. According to this narrative, our willingness to bail the banks out right now may be an indictment of our laxity in letting them grow so large, but it is not a contradiction. The problem with this narrative, though, is that it doesn’t explain why we would choose a remedy — forced merger — that actually increases industry concentration and makes the leading banks bigger. If they were already too big, why would we make them bigger?
I have a better explanation: Big organizations tend toward incompetence. According to this narrative, we don’t actually need aggressive antitrust enforcement because big companies are more likely than not to do themselves in. Businesses that face even the threat of competition don’t generally get bigger screwing their customers. (In this, they are quite unlike many government entities, like large public school systems and of course the IRS.) But as they get larger, they begin to suffer from poor internal communication (particularly of bad news), sclerotic decision-making, a decline in independent thinking, and a breakdown of personal responsibility. They end up screwing their customers not because they can, but because they can’t not.
I would not go so far as to assert that all social units larger than Dunbar’s number are unstable. But whenever I read of the collapse of large and storied institutions like Arthur Andersen or Heller Ehrman, the sociology of the place usually seems like the likeliest cause. And perhaps, when the story of the current financial crisis is written from a safe distance, people will think that one important reason the five major investment banks all failed was because there were only five major investment banks.
Steven Pearlstein, writing in today’s Washington Post, highlights a small regional bank (Citizens South) that didn’t actually need any TARP money, but took some anyway and then came up with a creative way to use it to clear out shaky loans on distressed real estate. Pearlstein notes that the CEO of that bank made “only” $456,000 last year, and concludes:
And get this: Somehow the directors of Citizens South managed to attract and retain a chief executive who turned in respectable profits during good times and bad, and yet was able to pay him only 10 times the salary of the average employee. Pretty neat, huh?
So here’s a question the House Financial Services Committee might put to the Titans of Finance: How is it that Kim Price, a community banker with an undergraduate degree from Appalachian State University, a tiny executive staff and a pay package that you would consider insulting, somehow managed to come up with a more creative use for his government bailout money than any of you?
To Pearlstein’s rhetorical question, I would like to suggest this answer: It’s because a large number of small businesses is bound to outperform a small number of large ones.
We might have taken a different course in October. Large banks with too many toxic assets might have been declared insolvent; their assets might have been purchased by a number of different regional banks with healthier balance sheets, and the blue chip companies who all of a sudden had no credit with the major commercial banks could have switched their business to the upstarts. Ditto with the law firms and other businesses farther down (or is it up?) the food chain. As with banks, there are natural forces that push us along toward recovery.
But instead, we made everything bigger, from the government dishing out the money to the banks lining up to take it. Maybe the folks in Treasury and the folks in the Antitrust Division of DOJ should sit down together and figure out what they really think about market concentration.