Ogopolistic Rents

James Fallows passes along this interesting
chart involving the consolidation of the banking industry this morning.

It’s a fairly standard part of microeconomics 101 that in a market with high
barriers to entry, the market will tend towards domination by 3-5 players
who will then be more or less able to set their own prices at a rate which
is *higher* than the market clearing rate were the market actually
competitive. This seems to be what is happening with the commercial banking
industry, and explains (to a certain extent) why the banks are able to get
away with things like the new debit card fee. (It’s a little bit odd,
though, because retail banking still has a lot of competition,
mostly from very small firms; I suspect there’s some mass psychology reason
for people not abandoning jp morgan chaseapple s bank in favor of apple
savings bank, for example).

What’s interesting to me about the chart is that it suggests that something
changed substantially in the mid 1990s. It *could* be that the barriers to
entry in the banking industry suddenly went up; or it could be that some
artificial barrier to consolidation disappeared. A lot of the consolidation
happened after 1999 – the four majors of today were 20 seperate institutions
in 1998 – which points largely at the repeal of Glass-Steagall, a law which
had (by design) artificially restricted the consolidation of the banking
industry because of a depression-era belief that such consolidation was a
contributing factor to the depression.

All of which brings to mind the following questions:

(a) was the consolidation of the banking industry an intentional
byproduct of the repeal of Glass-Steagall, or was it an unintended (if
predictable) side effect?

(b) did the consolidation of the banking industry contribute to the 2007
economic crisis?

(c) to the extent that (b) is true, and particularly to the extent that the
answer to (a) is yes, shouldn’t the architects of the repeal of
Glass-steagall be held accountable for the outcome, including the entire
Clinton economic team?
October 05, 2011 at 10:14AM