We’ve all heard the phrase that companies such as Citigroup, AIG, Bank of America, GE and GM are too big to fail. These companies’ reach extends into many businesses and if they fail the system would come to a screeching halt. In order to prevent a system wide crash these companies must be propped up with billions of taxpayer dollars. Of course we never hear that these companies should have not been allowed to grow to a size that presents a systemic risk nor do we hear that these companies can and should be broken into smaller pieces.
Breaking up monolithic companies is not new. Standard oil was broken up more than 100 years ago and gave us Exxon, Mobil and a bunch more companies. And who could forget splitting AT&T, Ma Bell, into many regional companies. We were told that breaking up the monopolistic phone company would lead to communication darkness; instead we have more choices, better phone service and less expensive phone rates. More recently, we’ve spent billions splitting up and fixing the mess of Enron, the criminal trading firm and Long Term Capital, the wayward hedge fund that had many times more debt than capital.
With all these cases, came predictions the world would come to an end, if the government didn’t save them. Each time these companies were absorbed into the market and the world kept spinning.
Bank of America, Citigroup and JP Morgan/Chase have an oligarchy control over consumer, small business and real estate credit markets. When these banks cut off credit to these markets there are very few alternatives for consumers and small businesses to access credit which has a devastating affect on the economy. Over the past few months, these banks have been systematically cutting off credit to consumers, businesses and real estate in direct violation of the bailout agreement.
The real estate market is especially susceptible to manipulation by the few companies that exercise great control over this massive market. When these companies create new products the market is awash in them, when these companies stop lending the market crashes. The real estate market downturn was in part caused by the lack of lending and available credit from these uber-institutions.
For many years, banks were regulated against becoming too big to prevent market manipulation and to limit the systemic risk that any one institution would have. I believe that in order for the economy to recover and bring back healthy credit markets, these al encompassing banks like Bank of America, AIG, Citigroup and Chase need to be broken up into separate insurance, investment banking, trading and depository banking companies. We need to reinstate the regulations in place from the 1930’s and employ mechanisms that prevent companies from growing to a size that is “too big to fail”.