November 28th 2009

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Articles from this issue:

SAME-SEX MARRIAGE: Are we about to create another Stolen Generation?

CANBERRA OBSERVED: National sorrow over plight of forgotten Australians

EDITORIAL: ETS: Rudd's one-way ticket to hell

POLITICS: Whither the Liberal Party?

COVER STORY: Brian Mullins (1925-2009): a true Australian hero

CANBERRA OBSERVED: National sorrow over plight of forgotten Australians

SAME-SEX MARRIAGE: Are we about to create another Stolen Generation?

FINANCIAL CRISIS: Splitting the megabanks for financial stability

FOREIGN AFFAIRS: Afghanistan: Obama's no-win rhetoric

WAR ON TERROR: Grim lessons of the Fort Hood massacre

NATIONAL AFFAIRS: Rudd's 'Indonesia solution' has been in place since 2007

HEALTH CARE: Labor unleashes class war on doctors

NEW ZEALAND: John Key sells New Zealand short

COLD WAR: The year the Berlin Wall fell

UNITED STATES: Obamacare: the ego has landed

ABORTION: An abortion-provider changes her mind

Statesmanship needed (letter)

American health cover (letter)

Some orphanage carers were admirable (letter)

BOOK REVIEW: THE VOCATION OF BUSINESS: Social Justice in the Marketplace, by John C. M├ędaille

BOOK REVIEW: THE THIRTY-SIX: A story of a boy's miraculous survival in wartime Poland, by Siegmund Siegreich

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Splitting the megabanks for financial stability

by Patrick J. Byrne

News Weekly, November 28, 2009
To restore stability to the financial system and to ensure efficient wealth creation, the "too big to fail" banks need to be broken up, invoking the principle of subsidiarity, argues Patrick J. Byrne.

Two issues are near the heart of the worldwide "Great Recession" - imbalances in world trade, and the enormous concentration of economic power in US and UK financial institutions.

Imbalances in world trade were caused by Eastern economies, like Japan and China, artificially keeping their exchange rates low so as to make their exports cheaper for the West, particularly the US. The East produced; the West consumed. The East accumulated huge trade surpluses. The West borrowed these surpluses to pay for imports.

For the West's financial institutions, the huge flows of money borrowed by the US and the UK became the gambling money of casino capitalism. It provided easy money that caused inflated property, stock and derivatives markets.

Global concentration

At the same time, there was an accelerating global concentration of economic power in the hands of fewer and fewer banks.

Niall Ferguson, writing in the UK Telegraph (October 5, 2009), says: "The past two decades witnessed an unprecedented concentration in the financial services sector. Between 1990 and 2008, the share of financial assets held by the 10 largest US financial institutions rose from 10 per cent to 50 per cent, even as the number of banks fell from over 15,000 to about 8,000.

"By the end of 2007, 15 megabanks, with combined shareholder equity of $857 billion, had total assets of $13.6 trillion and off-balance-sheet commitments of $5.8 trillion - an aggregate leverage ratio of 23 to 1. They also had underwritten derivatives with a gross notional value of $216 trillion - more than a third of the total.

"This was far from being a purely American phenomenon. By 2003 the five largest banking groups in the UK accounted for 71 per cent of deposits and 75 per cent of loans."

When the financial crisis set in, these banks argued that they were "too big" to be allowed to fail. They argued for the largest taxpayer funded bailout in history, and they got it.

However, as Ferguson and many others have argued, if these banks are too big to fail, they are "too big to exist," because, if they are too big to fail, they are too big to manage.

Ferguson asks, how can we best get rid of the "too big to fail" banks without increasing the power of government in the economy still further?

Simon Johnson, former chief economist at the International Monetary Fund, said in The Atlantic Monthly (May 2009) that, over the past decade, there flowed "a river of deregulatory policies" that were "astonishing". This allowed the increasing concentration of the financial system.

Consequently, these huge banks wield inordinate power over the political system, and Johnson warns that, unless the banks are broken up and re-regulated, another financial crisis could precipitate an even deeper world economic crisis.

In the same vein, John Kay entitles his UK Financial Times (November 10, 2009) article, "Powerful interests are trying to control the market". He argues that we are witnessing a new generation of "rent-seekers". These are financial corporations and senior executives exploiting their economic power to suppress competition and wealth creation, to extract exorbitant profits and salaries.

Kay says that "control of rent-seeking requires decentralisation of economic power. These policies involve limits on the economic role of the state; constraints on the concentration of economic power in large business; constant vigilance at the boundaries between government and industry; and a mixture of external supervision and internal norms to limit the capacity of greedy individuals in large organisations to grab corporate rents for themselves.

"Vigorous pursuit of these is the difference between a competitive market economy and a laissez-faire regime, and it is a large difference.

"Privatisation and the breaking up of statutory monopolies has reduced rent-seeking by organised groups of public employees. But the scale of corporate rent-seeking activities by business and personal rent-seeking by senior individuals in business and finance has increased sharply.

"The outcomes can be seen in the growth of Capitol Hill lobbying and the crowded restaurants of Brussels; in the structure of industries such as pharmaceuticals, media, defence equipment and, of course, financial services; and in the explosion of executive remuneration."

In other words, these leading economists are saying that excessive concentration of economic power violates the principle of subsidiarity (which also happens to be a fundamental principle of Catholic social teaching). In essence, this principle states that a larger institution should not usurp what a smaller body can do just as, or more, effectively.

Breaking up the megabanks is needed to make them manageable, to ensure efficient wealth creation and to restore economic stability to the world economy.

The world is a long way from seeing this happen.

Patrick J. Byrne is national vice-president of the National Civic Council.


Simon Johnson, "The quiet coup", The Atlantic, May 2009.

Niall Ferguson, "There's no such thing as too big to fail in a free market", The Telegraph (UK), October 5, 2009.

Niall Ferguson, "Too big to live", Centre for Policy Studies (London), October 6, 2009.

John Kay, "Powerful interests are trying to control the market", Financial Times (London), November 10, 2009.

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