Tuesday, July 24, 2012

Old-School Liberterians Thought Huge Banks Should Be Nationalized

Henry Simons was/is a hero of the modern libertarian movement. If he were still alive,
he'd probably be calling for the nationalization of the U.S. megabanks.

The NYTimes published one of the more intellectually stimulating op-eds I've read recently, highlighting how Henry Simons, one of the founding fathers of modern libertarianism, would almost certainly be appalled at how large and powerful megabanks in the U.S. and abroad have become.

Regular readers of this blog might recognize that this blog has certain libertarian tendencies, particularly towards issues of justice and jurisprudence, as well as culture war issues, while this blog tends to find most modern libertarian economic principles morally abhorrent, as they tend to advocate a dog-eat-dog, let-the-poor-starve world in which wealth makes right.

Old-school libertarians, however, seemed to be concerned foremost with guaranteeing the greatest amount of freedom for the largest number of people (though this blogger would also point out that it's hard to cherish or care about freedom if you're starving, naked, or homeless) - and that's a principle I can get behind, even if I would disagree with the old-school libertarians about exactly what that means for the practice of governance.

One surprising result of the old-school libertarians' love of freedom was a willingness to acknowledge that corporations could simply grow to be too large - and if they became too large to control and began to infringe upon the freedoms of the public, then it was the responsibility of the government to step in and nationalize those corporations in order to protect the freedoms of the many.

From the NYtimes op-ed:
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?
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.
It's actually relatively straightforward logic - if what you care about most is individual freedom, and a corporation (or set of corporations) has grown so large that it threatens individual freedom, and there's no reasonable way to control them or ensure market competition, then the only logical option that remains to the government is nationalization.

That's what old-school libertarians would think if they lived in today's world - somehow, I doubt we'll be hearing those kinds of prescriptions from their intellectual heirs anytime soon.


  1. You're right about that last point.

    When it all started to come apart in 2008, I searched JSTOR and Google Scholar, looking for studies of the optimum size for a bank relative to its surrounding economy. Everything I found said bigger was better. Nobody seemed to have addressed the question of whether 10 10-billion-dollar banks could be better than 1 100-billion-dollar bank.

    1. Joe: Yup, that's not particularly surprising, that there was no dissent from the prevailing view. It's one of the big problems of modern academia - since so much of universities' funding comes from Corporate America, much of what academia puts out supports whatever the corporate line happens to be. In the 90s and 2000s, one of the central lines was "bigger is better," especially in banking.

      -The Angry Bureaucrat