The Curse of Bigness
October 6, 1998 – published in St. Paul Pioneer Press
At the beginning of this century, American leaders railed against what Supreme Court Justice Louis Brandeis called the “curse of bigness”. Presidents, Senators, commentators all decried the pernicious effects concentrated economic power has on small businesses, communities, and ultimately, on the viability of self-government. And they backed up their rhetoric with a series of laws that made bigness itself a criteria for government intervention.
As this turbulent century draws to a close, economic concentration is proceeding at an almost unimaginable pace. In the first six months of this year, 4500 corporate mergers were filed for a combined value of $1.7 trillion. The list in every sector of recent corporate megamergers is impressive: SBC and Ameritech, Chrysler and Daimler-Benz, Travelers and Citicorp, Enron and PGE, Monsanto and American Home Products, WorldCom and MCI, Columbia and HCA HealthCare.
In the face of this unprecedented rush to gigantism, our leaders not only refuse to act. They aid and abet this assault on democracy and community. Consider what has happened just in the last few days. By now we all know about the debacle of the nation’s largest hedge fund, Long Term Capital(LTC). We’ve learned that hedge funds control some $80 trillion, ten times more than the entire U.S. economy and far more than the resources of the world’s central banks. And we’ve learned that despite this immense power, the power as we’ve recently discovered, to destroy national economies and put the global economic system at risk, we don’t regulate hedge funds at all.
We’ve allowed a monster to grow in our midst. And when it gets sick, the Federal Reserve steps in because, in the words of a New York Times front page headline, LTC was “Too Big To Fail”.
Congress immediately held a hearing in which several members of Congress criticized the Fed’s action. But the same week, Congress itself moved close to an agreement to repeal the Glass-Steagall Act, a piece of legislation that prevented the merger of speculative and depository financial institutions. That Act was passed in the 1930s to prevent a repeat of the financial speculation that contributed to the Great Depression. Does anyone in their right mind think this is the appropriate historical moment to repeal that law?
The same day the Fed brokered a deal to bail out LTC, it approved the merger of Citicorp and Travelers Group. The new company, Citigroup boasts over $700 billion in assets and will serve more than 100 million customers in l00 countries. Talk about too big to fail!
Why is Washington giving the green light to such concentrated economic power? Not because bigness benefits the economy. A l996 Federal Reserve study found that big banks devoted only 2.5 percent of their commercial loans to small borrowers and only 0.7 percent to “very small” businesses, defined as those with less than $1 million in bank credit. Small banks, by contrast, made 82 percent of commercial loans to very small business borrowers. The US Public Interest Research Group found that big banks charge an average of l5 percent more in banking fees than smaller banks.
Instead of aiding and abetting megamergers, Congress should declare a moratorium on such concentrations. Already there are calls for this in some sectors. The American Public Power Association and the National Rural Electric Cooperatives, for example, have formally asked the Federal Energy Regulatory Commission and the SEC to impose a moratorium on further electric utility mergers of companies with over 1 million customers. Joe Klein, who heads up the Department of Justice antitrust division agrees.
Congress should also change the criteria for merger approval to shift the burden of proof from the public to the company. We should demand that the company prove that the proposed merger is in the public interest. Today the regulatory agencies define the public interest in ways so narrow as to make Louis Brandeis weep. All a company seems to need to do to gain regulatory approval is promise not to raise prices for a limited time. To add insult to injury, regulators treat massive layoffs as a positive, not a negative effect!
To many politicians, the lesson of the LTC disaster is that we need to regulate hedge funds. That won’t get us out of the hole we’ve dug. The central problem is not that these institutions are unregulated but that their resources far exceed the capacity of government at any level to monitor and control their activities. We need to listen once again to the words of Republican Theodore Roosevelt and Democrat Woodrow Wilson. Size matters. Concentrated economic power puts our nation at risk. Government has the authority to promote a competitive, decentralized economy that nurtures strong communities and safeguards a healthy democracy. In this election year we should demand that government exercise that authority.