Will Republicans Support Breaking Up Big Banks?

The Conservative Case Against Big Banks

Conservative columnist Peggy Noonan says it is "pirate time" for Republicans. They need to be bold and capture the Democrat's issues that rightly belong to them. For Noonan, this means go populist and call for breaking up the "too-big-to-fail" banks. This would not be the first time conservatives have urged Republicans to do so. Will Republicans listen?

"If you are conservative you are skeptical of concentrated power. You know the bullying and bossism it can lead to. Republicans should go to the populist right on the issue of bank breakup," Noonan wrote Sunday for The Wall Street Journal. "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. People think the GOP is for the bankers. The GOP should upend this assumption. In this case good policy is good politics."

The five largest U.S. banks – Citigroup, Bank of America, Goldman Sachs, JP Morgan Chase, and Wells Fargo – now have combined assets equivalent to almost 60 percent of national output. Also, they represent nearly 44 percent of all bank deposits in the United States. In 2007, just before the 2008 financial collapse, that number was 37 percent, and 10 years ago it was only 28 percent.

The financial collapse was partly the result of poor decisions made by the largest banks. The fact that the institutions that contributed to the collapse were then helped by the government (through TARP I under President George W. Bush and TARP II under President Barack Obama) has many voters upset. Indeed, even though the Tea Party and Occupy Wall Street movements are from opposite sides of the political spectrum, they both have a distrust and dislike of the large banks.

The conservative case against big banks has also been made by Simon Johnson, professor at the MIT Sloan School of Management and a senior fellow at the Peterson Institute for International Economics, and conservative columnists David Brooks, Ross Douthat, James Pethokoukis, and George Will.

It may sound odd, at first, to hear that there are conservatives who want to break up the big banks. Are not conservatives, after all, defenders of big business? Opposition to big banks, though, is not about what conservatives are for, but what they are against. Specifically, the big banks exist because of big government, and conservatives are opposed to big government.

The conservative case against big banks is mostly based upon two interrelated concepts – moral hazard and crony capitalism.

A "moral hazard" is created when banks become "too-big-to-fail," the argument goes. The implicit assumption that the government will bail out a bank that is near collapse, because not doing so will wreck the economy, means that the bank will likely take more risks – this is what is meant by moral hazard. There is little downside to more risk, after all, if the bank knows that it will be bailed out if the risky bet turns out to be a bad bet.

If the failure of any single bank threatens the entire U.S. economy, therefore, should it even be allowed to exist, the critics ask?

The moral hazard concern is part of a broader concern about crony capitalism. Crony capitalism is when businesses get special privileges from the government.

Crony capitalism is actually not capitalism, but a perversion of capitalism because it interrupts free markets where price is determined by supply and demand and consumers make choices based upon which businesses provide them the best service at the best price. With crony capitalism, the crony businesses are using the government to give them an advantage over their competitors.

There are many ways that cronyism can work. Special tax deductions and subsidies are some of the more common examples.

For another example, big businesses can seek greater government regulation to keep smaller competitors from gaining a greater market share. The larger companies have an advantage in a system with a large number of regulations because they have the resources to manage the requirements of those regulations whereas smaller companies do not.

It is natural, therefore, for any who are opposed to big government to be opposed to the big banks. These conservative critics argue that the big banks are, essentially, big government cronies. "Big business needs big government," is a phrase often heard in some conservative and libertarian circles. Indeed, the reason the banks got so big in the first place, Pethokoukis argues, is crony capitalism.

There are different ideas about how to encourage the big banks to dissolve themselves into smaller parts. Johnson advocates higher capital requirements. Pethokoukis suggests that traditional banking activities and the more complicated brokerage activities not be allowed to exist in the same company.

Whether the Republican Party will adopt this platform is yet to be seen. There are signs that Rep. Jeb Hensarling (R-Texas), the new chair of the House Financial Services Committee, supports the idea of breaking up the biggest banks. He could find common cause with some liberal Democrats as well, such as newly-elected Sen. Elizabeth Warren (D-Mass.).

One of the challenges, though, of getting congressional Republicans to go along with this agenda, Johnson and Pethokoukis both point out, is that many Republicans receive campaign donations from those large banks (yet another example of how crony capitalism works).

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