Editor’s note: The following guest commentary is from Geoffrey Manne, a lecturer at Lewis & Clark Law School in Portland, Ore., and Executive Director of the International Center for Law & Economics. It first appeared on the Truth on the Market blog. Portions of it are reprinted below with permission. The post responds to arguments made today by the Baseline Scenario and Financial Times in favor of opening an antitrust investigation into the banking sector.
To read the full post, click here.
By Geoffrey Manne
Jan. 21, 2010
Simon Johnson is at it again, advocating the use of antitrust to break up the banks because they are, you know, big, and antitrust is about busting up big companies, right?
As Josh suggested back in July, the idea is gaining momentum, it seems. The Financial Times is also pushing the idea. What’s remarkable about both the FT’s and Simon Johnson’s “analysis” is that it is actually largely devoid of modern antitrust analysis. It reflects the outdated, non-economic (dare I say anti-economic?) logic of the structure-conduct-performance paradigm of the 1960s. Here, for example, is the FT:
The issue is not just market share in deposits, which attracts public attention. Many corners of the financial services market with a lower profile are highly concentrated and highly profitable.
Concentrated markets can still be competitive and high profits are not in themselves proof of anti-competitive behaviour. Market concentration is high in many industries – including new areas of the economy such as web search.
Anti-trust investigation would focus only on areas where critics allege anti-competitive behaviour, for example, the puzzle of why investment banks charge standard rates to raise equity capital for businesses. But even where there is no suspicion of collusion, regulators could examine market structures and practices that create barriers to entry.
Or, the administration could simply float the idea of a wide-ranging push on competition in banking and use it to gain leverage over big banks on issues such as regulatory reform and whether or not they pass on the cost of the financial levy to their customers.
So, yes, there is a nod (”concentrated markets can still be competitive . . .”) toward recognition that Demsetz does, indeed, exist and he did write Industry Structure, Market Rivalry, and Public Policy in 1973. But the thrust is pure SCP.
Here’s Johnson:
There are definite elements of oligopoly in wholesale markets, underwriting new issues, and mergers and acquisitions both in the United States and around the world. This is part of the explanation for very high profits in banks — particularly big banks — over the past decade.
The question becomes: Is there evidence that our leading banks have used their pricing power or other aspects of their market muscle to keep out competition or otherwise distort behavior in very profitable arenas, like over-the-counter derivatives?
I don’t even know what that means: “pricing power or other aspects of their market muscle to keep out competition?” Huh? It’s just hand waving. And my favorite part:
We may also need new theories of antitrust.
Sure. Why not? Here “new” seems to mean “old,” but by all means we should launch antitrust investigations with the intention of developing new theories of antitrust that can justify the a priori policy conclusion that banks are violating the antitrust laws. That’s some sound policy advice from the IMF’s former chief economist.
Read the whole post here.
