Banking Oligopoly

The topic this week is Markets. This is a tricky economics topic because the terms "market", "markets", and "market economy" are used so often in the mainstream without any real critical discussion on what these terms really mean. When we learn about markets in economics, we are often only taught the abstract, theoretical meaning from the school of thought called neo-classical economics. In this theoretical world, markets are magical places where there are no barriers to entry for producers, all involved have perfect information, and there is perfect competition. This means that there are many small buyers and sellers, all of which wield no power over the structure of the market. Only in this setting can a market truly facilitate the laws of supply and demand and move towards an equilibrium position which is equally beneficial to both buyers and sellers.

Lets look at the banking industry in the US through the lens of markets. First off, let me state that no market in the real world functions without power, with perfect information, and with no barriers to exit or entry. If you read this post by the Institute for Local Self-Reliance on the banking system, you find immediately that this industry market is not one of perfect competition. First, they note that, "the top banks now control 60 percent of U.S. bank assets, but provide only 27 percent of small business loans." The market for banks in the US operates more like an Oligoply, defined as a market which is dominated by a small group of producers/sellers where entry is difficult. Why is this important? Well, both sides of the political system constantly legitimate everything they do and stand for in terms of how much their policies support small and family businesses. Small businesses after all do create the largest share of jobs in the economy, and they operate more as a model perfect competition market than any other sector. I imagine that early economists were modeling their theories for how markets work based on their experience with thriving local economies filled with many small businesses competing with each other.

Is the American Dream actually about inequality?

The American Dream is a complex phenomenon. I think that it is a great dream in many respects and perhaps can be boiled down to, "everyone deserves a good life." However, there is also a dark underbelly to our concept of the American Dream. This dark underbelly is composed of both the mental models held at large in our society concerning the American Dream and the actual structure of our economic system.

Lets start with a discussion of the structure of our system. In one of Norm's posts yesterday he talked about the role our financial sector is supposed to play; that of allocating capital to its most productive uses. So, this sector of our economic system is really supposed to act more as a secondary level sector. What I mean by that is its role is secondary to, or to facilitate the activity of, the productive parts of the economy. However, Norm notes that, "financial assets grew from 81% to 137% of GDP between 1990 and 2005." This is indicative of a financial sector which has started to use its wealth and power to generate its own product, more wealth and power, instead of facilitate the growth of industries which produce real goods and services that people need. If the products produced by financiers, banks, and Wall Street are equal to 137% the value of GDP (which is supposed to measure the market value of all real goods and services), then this sector is using wealth to produce wealth for the wealthy. We are all currently experiencing the results of this development in our economic system as we struggle through what is being called The Great Recession which was caused by the highly risky activities of the financial sector. The events which led up to the Great Recession can be most aptly described by what a former BGI student called, a "profit tornado."