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Why Too-big-to-fail = Too-big-to-exist

This was a commentary which I had intended never to write. The reason is that by this point in time I simply assumed that the topic would have been covered so many times that any further analysis would be redundant. How wrong I have been!


A recent article in The Telegraph noted with amusement that China's Premier, Wen Jiabao is reading Adam Smith's The Theory of Moral Sentiments, as China studies “capitalism”. What a pity that the economists in our own societies have never studied this subject.


Of course I am exaggerating here. Our “economists” have all studied the portion of capitalism which talks about the benefits of corporations growing larger. However, apparently every, single one of these pseudo-experts in the West collectively ceased their studies with respect to all capitalist theory which describes the harm caused by corporations growing too big – material typically covered in the first year of any economics program.


There are no revelations here. It has been widely known for hundreds of years that when corporations grow too large they cease to provide any net benefit to society, instead becoming parasitic – and steadily erode the standard of living of members of society, while they grow ever fatter (and even more parasitic).


There are two categories of these corporations which capitalist theory defines as “too big to exist”: oligopolies and monopolies. As with much of our language, these terms are derived from Latin. “Mono” means “one” in Latin, while “oligoi” means “few”. The latter half of these words is derived from the Latin word “poleein” - which means “to sell”.


This definition revolves around the fact that the typical, hypothetical example of a monopoly/oligopoly is where a seller (or small group of sellers) are able to force price increases for their product onto consumers far above their marginal cost of production – leading to what capitalists themselves describe as “excessive profits”. However the actual definition of an oligopoly (or monopoly) is much broader than this hypothetical example.


Wikipedia defines “oligopoly” as “a market form in which a market or industry is dominated by a small number of sellers (oligopolists)”. The key point – a market or industry dominated by a small number of firms - is that the “sellers” need not be sellers of a tangible good (for example, oil) but instead could be “selling” something intangible like financial services. Even more important is the verb associated with monopolies/oligopolies: to dominate.


Absolute control of a particular sector is not required. All that is necessary to satisfy the definition is that a corporation (or group of corporations) is able to “dominate” their sector – thus going from the typical state of existence in a capitalist society where corporations respond to “market forces” to a position where they create their own market dynamics.


It shouldn't be necessary to elaborate any further – as by this point it should already be crystal-clear that the huge, “too big to fail” Wall Street financial institutions are “oligopolies”, and by definition are “too big to exist”. However, given the monolithic “blind-spot” in the mainstream media with respect to these oligarchs, let me spell-it-out with specific examples.


JP Morgan, which borrows its own money at 0% (i.e. “free money) recently announced a new line of “small business” credit cards – featuring interest rates as high as 30% (see “Christmas Price-War Dooms Most U.S. Retailers”). In a competitive banking system profit-margins on lending are sometimes only a fraction of 1%. Does JP Morgan appear to be a company which “responds” to market forces, or does it simply dictate to markets?


In a competitive banking system, bank fees for overdrafts, late payments, and other trivial, clerical services are kept to reasonable levels through competition. Yet the U.S. Congress has been forced to legislate in these areas – as Wall Street banks simply jacked-up these fees, one after another, by many multiples of their previous level. And this comes at a time when the U.S. government claims there is zero inflation.


In a market with (supposedly) zero-inflation, and experiencing its worst downturn in at least 70 years, true competition would make it impossible to force such fee-hikes onto consumers.

Such examples are trivial, however, when compared to the most-glaring example of oligopolistic behavior: the
demand by Wall Street oligarchs for U.S. taxpayers to cover their gambling losses – because they are “too big to fail”. Someone who had never even seen a definition of the word “oligopoly” until today could employ the simplest of logic and immediately conclude that “too big to fail” is obviously a synonym for “oligopoly”.


Any corporation which can tell a government that it is “too big to fail” clearly “dominates” the market in which it exists. The day that the label “too big to fail” was created was the day it became an unequivocal fact that such corporations must be broken up. Indeed, the phrase “too big to fail”, establishes the perfect threshold for establishing the point at which an oligopoly must be smashed.


Potentially, at least, modern capitalist theory tells us that some forms of oligopoly do not reach a position of such absolute dominance as to become obviously parasitic. Such an analysis quickly becomes bogged-down with economic jargon and dubious assumptions – and fortunately can be completely dismissed from the current discussion.


The clear demarcation point at which an oligopoly becomes obviously parasitic is when the oligarchs become able to extract grossly excessive profits from the general public. JP Morgan's “small business” credit cards are obviously parasitic – coming at a time when JP Morgan has slashed its conventional lending to small businesses (despite promising to do the exact opposite).


Grossly excessive fees for virtually every “service” performed by banks are clearly parasitic – given that many of these “services” are automatically performed by computer with essentially zero marginal costs to the banks.


Undoubtedly the worst example of parasitic behavior was the decision by the parasites of the three most-prominent Wall Street oligarchies to award themselves approximately $30 billion in “performance bonuses” - for this year alone. For those who have problems with such large numbers, this is nearly equal to the combined wages of one million American workers – the “little people” from whom the oligarchs extract their excessive profits.


Could anyone possibly invent a more blatant example of parasitic behavior than one million jobs being sacrificed just to pay the bonuses of a couple of thousand oligarchs?


Even before Wall Street's multi-trillion dollar Ponzi-scheme “blew up” with the bursting of the U.S. housing bubble, it was completely clear that Wall Street big banks exhibited all of the characteristics necessary to satisfy the definition of “oligarchy”. However, it was after the meltdown began, when the oligarchs labeled themselves “too big to fail”, when they extorted $10 TRILLION in loans, hand-outs, and guarantees from the U.S. government, and when they continued to award themselves enormous “performance bonuses” that the oligarchies themselves proved to the world that they are “too big to exist”.


The fact that the same oligarchies who created the worst global meltdown in history have been allowed to grow much bigger is the ultimate rebuttal to the legion of apologists who continue to defend the “right” of these oligarchies to continue to exist (i.e. to continue to plunder the wealth of the U.S. economy).


In a competitive capitalist economy, no entity would strut around bearing the label “too big to fail” as a badge of honour. Instead, in a competitive capitalist economy such a label would be shunned as a death sentence – an open confession that a company has become “too big to exist”.


By any and every possible metric, Wall Street oligarchies are “too big to exist”. Unfortunately for the American people, they have allowed their political system (which at one time was the envy of the world) to degenerate into a two-party dictatorship – which itself has become “too corrupt to exist”.


Across an ocean, the United Kingdom has its own collection of bank oligarchies. However, its multi-party political system does not have the same vulnerabilities as the U.S.'s own truncated form of democracy – and thus its own “democracy” has not been hijacked, as has happened to the U.S. This crucial difference means that there is open, vigorous debate within government about the need to abolish these oligarchies.


Conversely, inside the United States, not only is there no talk of smashing these parasitic oligarchies, but even the thoroughly-gutted “bank reforms” proposed by the U.S. Congress are being strenuously resisted by the oligarchs. The banksters have made it utterly clear that they will permit nothing more than a(nother) coat of whitewash to be applied to their tarnished empire.


It is a sad commentary on American society that a nation which continues to take satisfaction in executing “criminals” (most of whom are poor, black males) completely lacks the will to end the existence of the most parasitic corporate entities the world has ever seen.

[Disclosure: I hold no position in JP Morgan]