The danger to the economy: Size does matter

One of the biggest underlying problems behind the financial crisis is size. These are the wages of years of mergers and industry consolidation, combined with weak or non-existent regulation. Thus, Wachovia today posted a loss of $8.9 billion — enough to add to the public funding of Amtrak by nearly eight-fold. In a healthy market economy, a bank with such performance could simply be allowed to "fail," with depositors covered by the FDIC and the shareholders who enabled the disaster taking the fall.

But Wachovia is too big to fail. Like its cousin investment banks on Wall Street and Freddie Mac and Fannie Mae, its collapse could bring down the entire economy. If necessary it will be propped up, as the Fed and Treasury have done with those other giants. (The immediate damage: $25 billion). That’s your money. Of course, the executive class will continue to take home tens-of-millions paychecks as a reward for these disasters.

And yet, the brain surgeons in the executive suites of Wachovia are merely trying to fix the bank enough to sell it. Jamie Dimon’s JPMorgan Chase seems to be the last shopper standing at the garage sale of the American economy. The result, in addition to calamity in Wachovia’s hometown of Charlotte, will be an even bigger behemoth to hold taxpayers hostage next time.

Recessions happen. Among other things, they purge the bad bets and speculation that especially mark the mature phase of an expansion. They provide new opportunities for entrepreneurs. In a healthy market economy — which includes fierce competition; low barriers to new competitors; strong, smart regulation, and a social compact — the damage is contained. This would be the American economy from the end of World War II until recently.

In other words, the hotshot executives and Masters of the Universe speculators who get in trouble need to pay the price, in the failure of their companies and the loss of their fortunes. This prevents the "moral hazard" of knowing the taxpayers will bail out one’s reckless decisions (e.g., Wachovia buying a huge subprime lender long after it became clear that the housing bubble had burst).

Yet "conservative" government since 1982 — including the Clinton years — has brought a sea change. Wachovia, for example, is the product of countless mergers with what were once considered large regional banks. Across the economy, industries have consolidated, reducing consumer choice, good jobs, civic vitality and competition. Laws were changed to allow this and anti-trust regulation has virtually vanished. Regulation? When I was in Charlotte, I learned that "banking had become so complex" that the bankers themselves were "teaching" the regulators about their shiny new toys such as derivatives. John D. Rockefeller never had it so good.

In addition to policy changes to deregulate industries, allow anti-competitive mergers and compromise regulators, size brought vast political influence. Fannie Mae and Freddie Mac, two utterly misbegotten giants chartered by the federal government, spent nearly $200 million to have Republican and Democrat Washington look the other way as the storm gathered. The same oligarchial sway has come from other consolidated industries. Why else would mergers get such favorable tax treatment, the Fed keep pumping money into housing, or executive pay swell to obscene levels?

As a result, when things turn down, these huge industries hold the entire economy hostage. Look who’s lining up for another bailout: airlines (as we continue to be a world laughing stock for our lack of modern rail service). The problem is most egregious in the banking sector, both with investment and retail banks. The great financial plays that began in the 1980s, combined with ill-conceived trade policies, have hollowed out much of the American economy. We produce much less of real value. Much of the economy is based on fanciful financial transactions, from the ubiquitous mortgage offices in every community during the boom to the giant securities on Wall Street that even Bob Rubin admitted he didn’t understand.

It may be no coincidence that as American industries have been ruined and blue-collar workers consigned to Wal-Mart distribution centers and the like, that the economy has become more dependent on bubbles: S&Ls, tech, real estate, finally coming home to roost in the credit markets themselves. The business cycle itself has been distorted, and it’s not nice to fool mother nature (or the hidden hand of the market).

One ironic consequences is all you "conservatives" get more and bigger government, if for nothing else to bail out these continuing messes. The "conservatives" voted to make regulators enablers and to allow Wall Street to do as it wished. Now, suddenly, they’re indignant?

And what hasn’t been conserved was the balance achieved from the 1940s through the 1970s between the private sector and government. It created the strongest, and soundest, economy in history. And it created the secure middle class whose savings are still funding the fatuous pursuits of today’s over-their-heads-in-debt Americans.

Change will require, at the least, no more big mergers, and a return to the balance of the past, along with making some very tough decisions for the future.