Break Up the Banks and Unleash the Future of Capitalism

Recently I got into a serious argument with a liberal relative. Although he’s completely wacka-doodle when it comes to issues like Obama, taxes and gun control, he is a decent man whom I’m proud chose to join my family by marrying my sister. He also has done more to help my mother than any of my siblings, and that includes me. The argument started with guns, ventured through Obamacare and ended up with the banks. What started as a complete disagreement on my side ended up in complete agreement when it comes to the banks.

“We should break up the banks,” he argued, his face flush with anger. “Just like we broke up AT&T.” He continued ranting about the banks but I stopped listening because the idea struck me: Yes we should break up the banks just like AT&T.

I remember a time before the AT&T break up. There were no cell phones, at least none available to the general public. We were stuck using CB radios (call sign: Bearcat). My mother didn’t have tone dialing because it cost several dollars more a month. The phones we had were made of some type of indestructible plastic that made good handheld weapons (I once considered using a phone in just this way while being held up at gunpoint at a video store I worked in). We lived in St. Louis and calls outside of St. Louis county were expensive, $.10-.15 a minute if memory serves, and a call across the Mississippi river to Illinois was double or triple that. The idea of calling a foreign country wasn’t ever seriously considered. The rates were several dollars a minute even when calling neighbors like Canada or Mexico.

Phone technology in the early 1980s was not that much different than the 1950s. While tone dialing was making inroads, especially at those homes having a new personal computer with a 2600 baud modem that needed the capability, the technology was static. Sure we had differently shaped phones, and cordless phones were on the horizon, but young people who have grown up with voice mail, cell phones that get ever more powerful, and wifi cannot imagine how dull telecommunications were prior to the break up of AT&T.

Like many at the time I opposed the break up believing that there was nothing wrong with the monopoly. Looking back at it I and many others had nothing to compare it to. Regardless AT&T was broken up, and nay-sayers like me were deluged with annoying calls to change our long distance service. Phone bills became complex and difficult to read. We were deluged with choices, and I remember being unable to call the neighboring county because I had not chosen a long-distance provider. “But the county isn’t more than 5 miles away,” I remember complaining to the phone company. “It’s not long distance.” “Blame the government,” I was told. I stuck with AT&T for years after the break up avoiding upstarts like MCI and Sprint to register my disapproval of their existence.

Looking back I believe the decision to break up AT&T was one of the most important policy decisions made by our government. To overstretch a metaphor, it was like the asteroid that wiped out the dinosaurs and allowed the mammals to rise, if by mammals we include the “baby bells” that began to devour each other. In the first years breakup opponents expected the feeding frenzy to continue until there was only one company left: AT&T in all ways except the name.

But things didn’t happen that way. Instead new services were offered and competition drove prices down. In the 1990s I was able to call the United States from Japan using a call-back service that didn’t exist prior to the breakup, paying $.40 a minute. During that time calls to neighboring area codes fell to pennies a minute, and even calls across the country weren’t much more. Cell phones appeared, as did other services like caller ID and voice mail. Phone companies invested billions in their networks, upgrading trunk lines to fiber optic and then gradually expanding fiber to the point where it reached my house in Delaware in 2009. Services appeared that I never imagined in the 1980s, and while this technological change could have happened eventually I have no doubt that it occurred when it did thanks to the government’s decision to end AT&T’s monopoly.

Now take a moment to consider banks. Banks are huge – and considered too big to fail just as AT&T was during its time. Banks like JP Morgan-Chase and Bank of America offer pretty much the same services they did a generation ago. If my father came back to life 35 years after his death, there isn’t much that would surprise him when it comes to banking. Sure I can check my balance on my cell phone or pay for things over the Internet using my credit card, but checking accounts, credit cards, mortgages, car loans, all the common banking products that were common in the 1970s are still around today. While they may be delivered differently thanks to technology, the products themselves haven’t changed much at all. In fact what would surprise him is that banking is an even bigger monopoly than it was during his time. All of the local banks in Missouri, Boatman’s Bank, Mercantile Bank, Community Federal, Bohemian, banks that he was familiar with are all gone. The diversity of banks, of banks geared towards particular ethnic groups or trades, has disappeared, replaced with a monoculture of less than a handful of national names – none of them with roots in St. Louis.

What would happen if the government forced the top banks in the country to break up, if it forced the top banks to do exactly what AT&T did?

Now where my brother-in-law and I differ is that he would view the break up as a punishment. Although I opposed the bank bailouts of the recent past (and continue to do so today) I’m more interested in seeing what would happen to banking if “an asteroid” hit the industry. Taxpayers would be saved from shouldering the socialized losses and privatized gains that have characterized the industry in recent years, and that by itself justifies breaking up the banks.

But what services would arise from competition? What banking equivalent of Skype would appear that would revolutionize capitalism and the underpinnings of our daily lives?

Sandy Weill, the Dr. Frankenstein of the “too-big-to-fail” bank, now rejects his creation and calls for its break up, so my brother-in-law and I are not alone. When an idea unites a billionaire, an elderly Leftist and an animal-loving libertarian, it’s time has come.

So when will the government get it’s collective head out of its bureaucratic butt and do it?

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21 Comments

  1. JamesG:

    When I was CFO of a multinational corporation one of my favorite conversational ploys when lunching in the 1970s with my non-American counterparts 1970s was to ask them to guess the number of banks in the USA. None of them came close to the number of more than 14 thousand.

    Those were individual banks, not bank branches. At that time the totals in other countries were hilariously smaller. Canada’s were in the single digits. Major European countries had a numbers in the double digits; maybe a few were in the triple digits if you counted regional banks but none of them had our crazy number.

    One of the major factors was state laws. Banks in Illinois were not allowed to have branches … not one! When I lived in New York none of the major banks could have branches outside the five boroughs of NYC. A California bank called itself “Bank of America” and unlike New York it was allowed to have branches throughout California but their individual checking customers had to buy travelers checks if they visited relatives outside California.

    Last time I checked the USA total is now around 7 or 8 thousand. Still too many but much lower due to liberalization of state/federal laws and mergers.

    I think the problem is not that big banks are big but that they stopped being banks and became banks/investment banks/investors/speculators. This old timer is jolted every time I hear someone refer to Goldman Sacks as a “bank”.

    Sandy Weill is right: bring back Glass-Steagall. But let’s not make the mistake of seeing the problem as one of simple bigness. We’re a big country and we need big institutions including banks that can compete around the world

    One change I would make would to shrink the derivatives market (which caused most of our recent problems) by the imposition of a simple easy-to-enforce government regulation: any institution that lends money cannot transfer the debt for X years. Many “banks” stopped doing due diligence when they began to sell their mortgages shortly after writing them. They stopped being banks and became “flippers”. (X could be a percentage: Say 20 percent: if you write a 30 year mortgage you must hold it for 6 years. Or it could be a number; 3 (5?) years or the life term of the loan whichever is shorter.)

    The first step is to insist that banks be banks, not trading houses.

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  12. Sara:

    Amen James G

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