Baton of competition passes to Asia
By Joergen Oerstroem Moeller
SINGAPORE - The emerging Asian economies and Asian financial institutions
feeling their way into the global economy are facing a steep hurdle: the
Western-dominated global financial system has never before been controlled by
so few, large and powerful institutions. The crisis generated by the sector's
reckless transactions has accelerated concentration instead of stimulating
competition and/or opened the door for new institutions.
In 2006, the world's 10 largest banks controlled 59% of global banking assets.
This is an astounding figure by any account. Nevertheless, at the end of 2009,
it has increased to 70%. The consequence is not difficult to spot. The
political system has
been ensnared, and has allowed itself to be ensnared, by these mastodons that
are too big to be allowed to fall even if their transactions may warrant it.
Knowing this, the institutions behave irrationally judged by economics but
wholly rationally measured by political standards. They take on transactions
that otherwise would be rejected because there are no risks while at the same
time a potential profit accrues to them - exclusively.
The merging of politics and economics in the American edition of capitalism
explains why things have developed that way. Since 1989, the US financial,
insurance and property sectors have devoted more than US$2.3 billion to
political parties and candidates. This is fully legal, provided transparency is
respected, partly telling why the figures are public. No other sectors have
come close to such sums. Current lawmakers have collected $661.6 million
through appropriate channels.
One could add to this indirect sums channeled by the financial sector into
influencing lawmakers through lobbying, which since 1989 amounts to $3.8
billion. Through 2008 until November 2009, lobbying orchestrated by the
financial sector can be calculated at $803 million. No wonder the US Congress
and the administration, under such bombardment of arguments backed up by money,
have been sensitive to the sector's sad plight. The administration's help
package, amounting to about $700 billion, has as its pivotal point that
everybody other than the sector itself must pay for the sector's calamities.
The background for this lies in the 1980s, when deregulation started, sponsored
by the policies of president Ronald Reagan and British prime minister Margaret
Thatcher, and driven by these two politicians' conviction that the markets know
best and that government is the problem.
This led to two crucial decisions that haunt us now. The first emerged in the
1980s, with the savings and loans (S&L) scandal in the US. These
institutions, primarily geared to receive deposits from households and lend to
property owners, were suddenly allowed to perform transactions hitherto
reserved for banks, but they were not subordinated to the same supervision as
banks.
It did not take long before the catastrophe happened. They started reckless
loan operations without knowing what they were doing, having no experience or
expertise, and as they were without supervision no one stopped them. In a few
years, they accumulated bad debts to the extent of forcing the government to
step in and bail them out to the tune of $125 billion, equal to 2% of the US's
gross domestic product. The bill was sent to the taxpayers.
In 1999, the US Congress disposed of the Glass-Steagall act that separated
commercial banks and investment banks. This act was introduced in 1932 in the
middle of the Great Depression under the influence of strong evidence that the
lack of separation was one of the major reasons for the crash on Wall Street in
1929. You would have expected that congress had not forgotten the S&L
scandal only a decade earlier or that the Federal Reserve would have raised the
alarm, but Congress moved on.
Almost as a carbon copy, events from the 1980s returned. The large deposits
held by commercial banks were let loose and where else could they go than into
operations hitherto reserved for investment banks, and as these investment
opportunities did not suddenly multiply they had to be augmented by drawing in
more hazardous transactions, such as subprime loans. In less than 10 years, the
share of subprime loans rose from 5% of all mortgage loans to the property
sector to more than 30% at the height of the crisis, according to some
observers, despite the fact that it was well known how risky such lending was.
Time will show whether the US Congress has learned its lesson. On its agenda is
a 1,300-page proposal about financial supervision/regulation. One of the core
sections opens the door for breaking up the mastodons, but the proposal does
not go so far as to make it mandatory.
Not surprisingly, we find the financial sector's mastodons fighting it tooth
and nail. This may be the reason that Congress is holding back instead of going
the whole way, making it likely that the effort will be an ineffectual gesture.
One hundred years ago, something similar happened when the mighty Standard Oil
(and American Tobacco Company) was broken into several - and in principle -
separate companies. It did not work because the owner of Standard Oil, John D
Rockefeller, and a few others, not only controlled the oil sector but also the
financial sector, knowing how to neutralize it. They also made sure that the
section inside the US Department of Justice having the task of enforcing
anti-trust legislation was starved of funds and staff.
The general lesson of all this is that the recent calamities were not due to
competition among institutions, but to a lack of competition that has grown
even worse over the present crisis. We now live in a corporative economic
environment with a limited number of financial institutions controlling most
economic activities and able to act without fear of competitors.
Even worse, the role of the government in some leading countries has changed
from providing a safety net for citizens in need of support to offering a
safety net for financial institutions, promising to keep them in business
whatever happens. The only common denominator is that the bill in both cases is
sent to the taxpayer.
For Asia, gradually but slowly taking over the mantle of the global financial
system from the West, the lesson seems to be that if we base the system on the
idea of competition, be sure that there is genuine competition. If not, it may
be better to build in another steering mechanism and be blunt about it, instead
of trying to deliver a distorted version of the free market/competition model
bound to fail.
Joergen Oerstroem Moeller is visiting senior research fellow, Institute
of Southeast Asian Studies, Singapore, and adjunct professor Singapore
Management University & Copenhagen Business School.
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