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The Big Bank Theory

January 13, 2010

Dean Baker in Boston Review:

Wall Street bankers, along with the rest of the players in the financial industry, like to think of themselves as swashbuckling capitalists. They battle cutthroat competition with one hand and oppressive government bureaucracy with the other. In reality, the financial industry is deeply dependent on the government. Far from the rugged, go-it-alone types they wish they were, they are more like well-dressed, coddled adolescents. And this is true in good times and bad.

The industry’s dependency takes five main forms:

• an explicit safety net provided by government deposit insurance; an implicit safety net provided by “too big to fail”; a special privilege of being the only untaxed casino; an open invitation to raid state and local governments for fees; a right to change contract terms after the fact.

These dependencies are entrenched, and, despite loud protests to the contrary, the removal of government from the financial sector is not really on the agenda. The issue up for debate is not the virtues of the free market versus government regulation. The industry wants government regulation, just not in a way that curtails its profits.

In thinking about regulation, then, we need a fuller appreciation of the industry’s dependency on government. This will not tell us what to do, but it should open the door to a debate about regulatory reform that takes up the real question: will regulation be structured in a way that advances the public interest or in a way that allows the financial sector to profit at society’s expense?

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2 Comments leave one →
  1. January 13, 2010 10:50 PM

    “The Big Bank Theory” is also an aria from the “The Big Bank Opera”, which premiered in October at Sanders Theatre, Harvard University, as part of the 2009 Ig Nobel Prize Ceremony. Video is online at http://improbable.com/2010/01/08/the-big-bank-opera-video/

    In supporting roles, the opera cast included nine Nobel laureates, and Benoit Mandelbrot and Stephen Wolfram.

  2. February 2, 2010 3:30 PM

    Generally I do not post on blogs, but I would like to say that this post really forced me to do so, Excellent post!

    surface encounters

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