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.


So, the problem with the US banking system acting as a oligopoly is multi-faceted. First, the post goes on to say that small community banks, "continue to provide 54 percent of small business loans." Yet, Today, there are 938 fewer small and mid-sized banks than there were three years ago and "their share of bank assets has fallen from 23 to 21 percent." So, small businesses are the vibrant cornerstone of our economy, they need access to capital to operate, small banks provide the great majority of that capital, yet they are loosing market share and the big banks are not lending to small businesses. The banking market is certainly acting as an oligopoly and as the concentration ratio (the share of total production, sales or revenues attributable to the largest businesses in the industry) increases, the inequality of access to capital increases.

The second problem with the US banking system acting as an oligopoly is that the activities of the biggest banks not only do not create jobs or new small businesses, but increase the inequality of wealth and endanger the whole economy. In Norm's post, he talks about the "Shadow Banking System," or the securities and derivatives markets which are now much larger in terms of total assets than the whole real depository system. In other words, one of the key functions of the banking oligopoly is to trade in phantom wealth, or financial instruments which are based on real deposites and wealth but are not themselves real. This phantom wealth trading is primarily done by the top banks, corporations and wealth holders in the world, for their own enrichment. It was the highly risky trading in this Shadow Banking Sector which made millions for those at the helm of the system while also tossing the whole real economy into a recession.

A recent New York Times Article by Joesph Stiglitz explicates the cost of growing inequality to our society at large. He describes how the oligopolistic markets in many industries which are growing ever more concentrated, funnel wealth to those at the top who then become more and more powerful both economically and politically. Stiglitz says this is a major problem, "because political inequality leads to economic inequality, which leads in turn to more political inequality, in a vicious spiral undermining our economy and our democracy." As noted in my post last week, this is another example of a Success to the Successors system trap. Rising inequality leads to more inequality. With the wealthy gaining more and more political power, their ability to lobby for policies which allow further oligopolistic market conentrations and tax evasion increases as well. Stiglitz expains how this also hurts our economy, "Were the rich paying their fair share, our deficit would be smaller, and we would be able to invest more in infrastructure, technology and education — investments that would create jobs now and enhance growth in the future."

What can be done about all of this? Perhaps we need to make structural changes to our economy which cause markets to act more like the neo-classical model of perfect competition and less like oligopolies. The Institute for Local Self-Reliance is advocating for the SAFE Banking Act, which breaks up the big banks by putting a cap on their maximum assests