Republican 'Pirates' and Big-Bank Breakups
Amid the wreckage confronting conservatives after President Barack Obama's re-election, all sorts of ideas are getting a trial run. The only trouble for the Republican Party seems to be that most of them are ideas that are more acceptable to liberals.
Peggy Noonan got things started last month in a column in the Jan. 11 edition of the Wall Street Journal with the risible headline "It's Pirate Time for the GOP" (never mind that pirates are thieves and murderers without a whole lot of respect for property rights). At the top of her list of policy recalibrations was dismantling the big banks. This, she said, would be an expression of conservative opposition to concentrated power.
"Republicans should go to the populist right on the issue of bank breakup," she wrote. "Too big to fail is too big to continue. The megabanks have too much power in Washington and too much weight within the financial system."
George Will, writing in the Washington Post on Feb. 8, picked up Noonan's idea. He too sees busting up the banks as a natural cause for Republicans to embrace.
After reciting a bit of the history of too-big-to-fail, which began when Ronald Reagan was president with the government's 1984 rescue of Continental Illinois, Will leaps to the present.
It's true, as Will says, that today's banks are larger than before the 2008 meltdown, and they control a much bigger share of the country's banking assets. That's partly because regulators dealt with the financial crisis by shepherding failing lenders such as Wachovia Corp. and Washington Mutual Inc. into the hands of healthier banks, in this case Wells Fargo & Co. and JPMorgan Chase & Co., respectively.
Will goes on to decry the size of today's banks, their complexity and opacity, and the risk they pose to taxpayers. He also bemoans the Dodd-Frank Act of 2010, which was designed to keep the behemoths in line. He complains the law is an unworkable mess whose rules will run to many thousands of pages once they are finally written. He doesn't bother mentioning that the financial industry itself is responsible for many of those pages in a campaign that's akin to a regulatory filibuster.
Will's biggest mistake, though, is concluding that "by breaking up the biggest banks, conservatives will not be putting asunder what the free market had put together." In other words, Republicans will further the cause of free markets and can break up the banks with a clear conscience.
There are two flaws to Will's line of reasoning, one factual, one political.
First, much of the history of the U.S. has been marked by antipathy to concentration of economic power. This manifested itself in opposition to the establishment of a permanent central bank up until 1913, as well as rules that constrained bank mergers. For decades, most banks couldn't expand beyond the closest county line.
As rules prohibiting bank acquisitions and mergers were rolled back, starting in the mid-1980s and culminating in the repeal of most of the Glass-Steagall Act in 1999, banks expanded, first throughout states, then across the country. Had the rules not been in place, banks long ago would have been much more concentrated. Big banks are creatures first and foremost of the free market, and only secondarily as a result of misguided regulators who assumed that size conferred safety -- an idea that was torched in the financial crisis.
Then there's politics. True, Mitt Romney in the first presidential debate took a swat at Dodd-Frank, which he called "the biggest kiss that's being given to the New York banks I have ever seen."
But Romney's six biggest campaign donors were all banks or securities firms, according to data gathered by Bloomberg. Obama received the bulk of the financial industry's donations in 2008. But his support for Dodd-Frank and demands that bankers be held accountable for their mistakes quickly sent most financiers back to their traditional Republican allies. Since Republicans led most of the opposition to Dodd-Frank, is it conceivable they could do an about-face and call for dismantling big banks?
Maybe conservatives and Republicans can get behind the break-up idea. The real question is, would they be willing to use a regulatory brake on the free market to achieve such a goal?
(James Greiff is a member of Bloomberg View’s editorial board. Follow him on Twitter.)