I got to thinking about whether a renewed commitment to the enforcement of Antitrust laws would be an appropriate remedy to problems caused by Citizens United. After all, if a corporation is so huge that its participation will warp the democratic process, it suggests that the corporation ought to be an appropriate target for an antitrust investigation.
Similarly, I always thought the use of the term "too big to fail" necessarily implicated antitrust laws. Unlike Amtrak or even AT&T, I never could understand either (1) the market failure that required government intervention; or (2) the public good that would otherwise go unfulfilled if in fact these too-big-to-fail firms failed. It was not that these firms created some product that was necessary to sustain our way of life. With neither predicate satisfied, I always thought that rather than being "too big to fail," the banks were too big to exist.
While occasionally discussed on the fringe, policy makers never gave consideration to imposing as a condition of the bailout a break up of the banks. Rather, the whole debate was framed as some sort of new-fangled ecological disaster.
OMG!!! Lehman and Bear Stearns have run aground!!! Their captains were drunk. Millions of barrels of crude CDOs have been spilled. [Images of dying otters; their fur matted with toxic CDOs.] The horror!!! OMFG!!! Goldman Sachs and its drunken sailors are going to crash too!!! [More images of dead otters.]
It was if the bailout addressed a new form of pollution. In my peculiar logic, I thought it made more sense to understand our government's reaction to the subprime crisis as if it were the financial industry's Exxon Valdez disaster. The bailout just being the cost of scrubbing clean all the CDO-smothered cormorants.
But my plan is not to revisit my whole limited liability thing.
No, my plan is to address a thought I've been chewing on this evening - antitrust law as a correlate to limited liability. If taxpayers are going to serve as insurers of last resort, there ought to be a way for us to manage our downside risk? I then got to thinking about rethinking how we apply our antitrust laws.
Before we go further, let me be clear - it's altogether likely that some dude or dudette has written extensively on this very subject. Hopefully they have as I hope to read their thoughts on the matter because right now I'm just making this stuff up.
With that said, I'll continue.
Speaking of methods of managing risk, why not redefine antitrust law in its context? Instead of evaluating a merger on the basis of whether it will create impermissible market power in some market dreamt up by some FTC or DOJ staff attorney, why not ask whether the merger will create impermissible systemic risk?
Presently, I lack a cite for the proposition. But I'm quite certain that the 18th Century fear of monopolies that culminated in Teddy's trust busting resulted not just from a fear of what the robber barons may do with their monopoly power but from the fact that monopolies are incongruous with American entrepreneurship that folks like Tocqueville very early on recognized as being central to the American ethos. Sticking with the gambling analogy, I think Tocqueville may have even analogized the American economy to a lottery.
What I'm saying is that monopolies, being entities that stifled the risk-taking inherent in individual enterprise, were in Tocqueville's America very much un-American. Being devout entrepreneurs (and inveterate gamblers), Americans in their gut understood that monopolies created suboptimal economic outcomes. So, economically speaking, Teddy Roosevelt was on to something.
But it wasn't until Schumpeter came along that Americans had more than their gut to justify their preference for policies favoring entrepreneurs over monopolists.
Schumpeter's creative destruction theory posited that it wasn't giant corporations that created innovation. It was the tiny firms on the fringe that came up with the ideas that would spawn entirely new economic models. And by and large, Silicon Valley has pretty much proved him to be right.
But really, what Schumpeter comes down to is plain old Darwin. The more genetic diversity in a species, the more likely it is to prosper. The more entrepreneurial diversity in an economy, the more likely it is to prosper.
It's about making as many bets as possible knowing that even if thousands fail, one will pay off at a million to one. In other words, it's about managing risk. Something DNA is inherently good at.
In these terms, a monopoly is basically an investment strategy of that may be debunked by a proverb. As a policy, monopoly advises us to put all our eggs in one basket. Monopoly is bad because it accelerates risk. Instead of thousands of little bets with minimal downside risk and potentially unlimited payouts, monopolies make one or two giant bets with significant downside risk and, at best, marginal payouts.
If tax payers are going to act as insurers of last resort, why should we choose to offer our services to monopolies? If our goal is to arrive at optimal economic efficiency (make the most bang for our buck), seems as if we should choose not to. Which to me pretty much is the sense behind antitrust laws.
Now, I'm not going to claim I know enough about anything to have some theory on portfolio allocation. But I know enough about the Kelly criterion to know that there are smart folks out there who know several orders of magnitude more applying Kelly's betting strategies to mitigate risk than the FTC will ever know about calculating market power. Perhaps, by applying Kelly's criterion, banks that are "too big to fail" would be determined to be a suboptimal betting strategy. Perhaps it would confirm that Americans know in their gut - to achieve an optimal economic allocation, our society's economic "bets" should be more widely spread.
And it sure seems that if the goals of antitrust laws are to create an optimally efficient economy, then it makes some sense to consider using as a benchmark optimally-efficient betting strategies in lieu of the FTC's present benchmark of defining "market power" which resembles not much more that the process of theologians counting how many angels fit on the head of a pin.
That's all for now.