The world desperately needs Glass-Steagall on steroids. Banking must be atomized -- a la America's 1933 Glass-Steagall legislation -- in order to separate high-risk investment banking from taxpayer-insured deposits. Canada does a reasonably good job of sequestering these businesses, but the facts are that excessively big banks like ours contributed mightily to the current global catastrophe.
Busting up the banking trusts is essential for the following reasons:
1) It eliminates the too-big-to-fail issue, which puts entire economies at risk.
2) Excessively large banks destroy democracies, like the United States, through inordinate influence on policy, politicians and regulators.
3) Oligopolies and monopolies are economically inefficient and charge excessive fees, earn excessive profits and pay excessive salaries and bonuses.
4) Oligopolies and monopolies don't innovate because they don't have to.
5) Oligopolies and monopolies are risky because they indulge in groupthink mistakes that are too large for economies and the business community to bear.
6) Oligopolies and monopolies fossilize markets by dealing with big entities, cronies, politically connected clients and nepotism.
7) Oligopolies and monopolies hurt economies because of overcharging and gouging.
The world's concentrated financial sector has been grabbing more than its fair share of wealth because it has been able to, and this must stop. Between 1989 and 1999, financial fees increased tenfold. Since the 1960s, the financial sector in the United States has more than doubled in size, from 3% of GDP to 7.5% currently. "This is like looting," said outspoken Boston money manager Jeremy Grantham, whose firm invests $89 billion in funds. "That 7.5%, that goes to financial fees, is on its way to 10%. This industry can grow to gobble up all the benefits of the real economy if allowed to. It is trying to grab our cash. It's obscene."
Despite the obvious benefits of busting up the bank trusts, the U.S. and other governments resist a Glass-Steagall restructuring. Washington's intransigence flies in the face of the anti-trust tradition in the United States. Americans invented a strong economy by keeping banks smaller and competitive, by blowing up Rockefeller's abusive Standard Oil of New Jersey into pieces to prevent it from owning the world and by curbing other robber barons through law. More recently, AT&T's breakup created innovation and competition, as did the prolonged (even if unsuccessful) attempt to break up software bully Microsoft Corp. Even though the bust-up didn't happen, the firm was cosseted and the possible stultification of the high-tech world was prevented.
Glass-Steagall is the only type of reform that will work, which is why Bank of England governor Mervyn King and former Federal Reserve chairman Paul Volcker came out last week in support of a global Glass-Steagall. But Washington, London, Ottawa and others are counting on regulation instead, even though that didn't work. Their position is even less justifiable given the fact that the meltdown has increased concentration of banking power, with even more accompanying problems. For instance, monopoly profits are why, months after Goldman Sachs was given $10 billion in taxpayer bailout funds, it has amassed $23 billion for bonuses this year -- an amount equivalent in size to the economies of Trinidad and Tobago, Estonia, Lebanon or Congo and Mongolia combined.
Goldman Sachs should be the first to be broken up. The firm would have disappeared if not for its $10 billion bailout (which it paid back) and is still at the taxpayer trough, thanks to its conversion of part of its business into a deposit-taking institution to get $26 billion taxpayer deposit insurance. Likewise, oligopoly profits are why a handful of America's other rescued banks also planned on handing out obscene salaries, forcing Washington this week to chop some salaries by 90% to appease an outraged public.
But slashing salaries is a one-time event that won't work as bankers learn how to get around such salary restrictions by paying themselves through consulting contracts, by outsourcing to partners, or by simply fooling regulators or co-opting politicians, as they have done for years. Governments must bust up the banking giants or risk ruination again.
Diane Francis blogs at National Post