Baton of competition passes to Asia


By Joergen Oerstroem Moeller
Asia Times
Jan 7, 2010


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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