Mr. President: Break up the financial behemoths now!

In his New York Times op-ed piece, economist and Nobel Laureate Paul Krugman pinpoints major defects in the Obama administration’s proposed plan for financial reform and suggests how to correct them. He doesn’t go far enough.

Too many financial institutions, including ones like Wells Fargo which has yet to be bailed out, are too big either to compete or to fail. Their enormous pools of resources enable weak or completely incompetent executives to:
1) hide their errors for years while collecting fat paychecks and bonuses,
2) destroy, inhibit or acquire smaller competitors based solely on the economies of scale and not on superior decision making,
3) insure that they can’t fail without destroying the market, thus eliminating corrections based on market forces,
4) develop too few market-tested leaders to sustain a healthy system and insuring that even inferior leaders are scarce enough to be highly paid
5) produce leaders who rise to the top by managing their superiors and developing “reputations”  rather than by competing in the marketplace,
6) produce systems that are too large and too complicated for anyone to manage effectively
7) buy votes in Congress and bamboozle the public

This set of problems can only be corrected by breaking up financial behemoths into at least 5 relatively equal pieces with separate ownerships and by instituting layers of regulations which prevent them from growing through acquisitions or mergers (a la the breakup of Ma Bell many years ago). A market based system needs at least 12 competitors of roughly equal size and none having more than a 5% share of the national market to enable market forces to reliably reward the good and ruthlessly weed out the bad while sustaining a healthy market.

So long as there are a handful of behemoths dominating any market, there will be crony capitalism nestled up to crony politics with inferior Executives enriching themselves and undermining our economic system. Government regulators, hired or appointed, will be undermined by political pressures paid for by inferior managers.

Related Posts:
Structural reasons that older, large organizations produce lousy leadership, low rates of innovation and threaten free-markets  (5/18)

“Too Big to Fail” is Un-American  (5/5)

Economic over-centralization driven by tactics and weak executives!  (5/1)

Management Bottlenecks: primary source of institutional failures  (4/10)

Economic Regulation and the Myth of Free Markets  (3/28)

Executive Compensation and Other Parasitic Loads  (3/13)