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Forum Post: Don't Regulate the Banks, Nationalize Them

Posted 2 years ago on July 23, 2012, 6:44 p.m. EST by PeterKropotkin (1050) from Oakland, CA
This content is user submitted and not an official statement

by Gar Alperovitz

The Barclays interest-rate scandal, HSBC’s openness to money laundering by Mexican drug traffickers, the epic blunders at JPMorgan Chase — at this point, four years after Wall Street wrecked the global economy, does anyone really believe we can regulate the big banks? And if we broke them up, would they really stay broken up? (Creative Commons / Flickr / doctortongs)

Most liberals in Washington — President Obama included — keep hoping the banks can be more tightly controlled but otherwise left as is. That’s the theory behind the two-year-old Dodd-Frank law, which Republicans and Wall Street are still working to eviscerate.

Some economists in and around the University of Chicago, who founded the modern conservative tradition, had a surprisingly different take: When it comes to the really big fish in the economic pond, some felt, the only way to preserve competition was to nationalize the largest ones, which defied regulation.

This notion seems counterintuitive: after all, the school’s founders provided the intellectual framework for the laissez-faire turn against market regulation over the last half-century. But for them, “bigness” and competition could easily become mutually exclusive. One of the most important Chicago School leaders, Henry C. Simons, judged in 1934 that “the corporation is simply running away with our economic (and political) system.”

Simons (a hero of the libertarian idol Milton Friedman) was skeptical of enormity. “Few of our gigantic corporations,” he wrote, “can be defended on the ground that their present size is necessary to reasonably full exploitation of production economies.”

The central problem, then as now, was that very large corporations could easily undermine regulatory and antitrust strategies. The Nobel laureate George J. Stigler demonstrated how regulation was commonly “designed and operated primarily for” the benefit of the industries involved. And numerous conservatives, including Simons, concluded that large corporate players could thwart antitrust “break-them-up” efforts — a view Friedman came to share.

Simons did not shrink from the obvious conclusion: “Every industry should be either effectively competitive or socialized.” If other remedies were unworkable, “The state should face the necessity of actually taking over, owning, and managing directly” all “industries in which it is impossible to maintain effectively competitive conditions.”

At the height of the Depression, eight major economists (including Frank H. Knight) put forward a “Chicago Plan” that called for outright ownership of Federal Reserve Banks, the nationalization of money creation, and the transformation of banks into highly restricted savings-and-loan-like institutions.

To be sure, Simons later revised some of his views, and in the main he and others weren’t focused on financial crises. After all, in the mid-20th century, banks were far less concentrated than they are today, when the five biggest — JPMorgan Chase, Bank of America, Citigroup, Wells Fargo and Goldman Sachs — dominate the industry, with combined assets amounting to more than half of the nation’s economy.

It’s also true that not all Chicago School economists (not to mention their descendants) agreed with Simons, especially on the controversial issue of nationalization. But the logic of his argument remains: With high-paid lobbyists contesting every proposed regulation, it is increasingly clear that big banks can never be effectively controlled as private businesses. If an enterprise (or five of them) is so large and so concentrated that competition and regulation are impossible, the most market-friendly step is to nationalize its functions.

What about breaking up the banks, as many on the left favor? Recent history confirms another Chicago School judgment: while a breakup might work in the short term, the most likely course is what happened with Standard Oil and AT&T, which were broken up, only to essentially recombine a few decades later.

Nationalization isn’t as difficult as it sounds. We tend to forget that we did, in fact, nationalize General Motors in 2009; the government still owns a controlling share of its stock. We also essentially nationalized the American International Group, one of the largest insurance companies in the world, and the government still owns roughly 60 percent of its stock.

Of course, it would probably take another financial meltdown to make banking nationalization politically tenable. But given how the sector has behaved since the last crisis, a repetition seems inevitable, and sooner rather than later. When it comes, we would do well to keep the work of Henry C. Simons and his acolytes in mind when we contemplate how to rebuild a more equitable economy.

http://www.commondreams.org/view/2012/07/23-7

9 Comments

9 Comments


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[-] 2 points by TitusMoans (2451) from Boulder City, NV 2 years ago

The nationalization of banks should have occurred at the time of the bail outs. Only the temerity of the President and legislative leaders prevented them from presenting nationalization to the American public as a viable option. Instead, our government bailed out the very villains that tied our economy to the railroad tracks.

And the banks are back at the same game again.

[-] 1 points by TrevorMnemonic (5827) 2 years ago

Interesting read!

[-] 1 points by beautifulworld (20778) 2 years ago

Great article. Thanks.

[-] 2 points by beautifulworld (20778) 2 years ago

Alperovitz outlines many good ideas there. Thanks.

[-] 1 points by shadz66 (19985) 2 years ago

"Seven Largest U.S. Banks Have Created Thousands Of Subsidiaries To Avoid Taxes : (Fed Report) - America's seven biggest banks now have more than 14,500 subsidiaries around the world, according to a new report by the Federal Reserve Bank of New York (h/t Bloomberg). They have hatched more than 10,000 of these subsidiaries since 1991, largely in an aim to skirt regulations and taxes" from ...

fiat justitia ruat caelum ....

[-] 1 points by shadz66 (19985) 2 years ago

'GR8' Post ! Re. 'Nationalising The Banks', perhaps also see :

"For the moment the Occupy Wall Street Movement has made it impossible for the government to bail out the banks again. However, far from bailing out the bankers, speculators such as Corzine of MF Global and Jamie Dimon should be prosecuted. It is not enough to say that what JP Morgan was doing was inappropriate from a federally insured depository institution. It is time for the people to call for these banks to be taken over and the big bankers removed."

"It is now time for audacity and more audacity. Nationalization and political education at the moment is more important than the elections. Bankers like JP Morgan profit from war and these forces want another big war so that the capitalists can recover. The peace and justice forces must be more vigilant. The JP Morgan Chase debacle heightens the desperation of the top one per cent in the USA."

radix omnium malorum est cupiditas ...

[-] 1 points by shadz66 (19985) 2 years ago

Thanx for the excellent link. Gar Alperovtz is very much at the forefront of the new thinking which is so urgently needed all over The U$A. For some other relevant links :

per aspera ad astra ...