"Global economic growth requires the services of big financial firms," concludes JPMorganChase CEO Jamie Dimon at the end of a Washington Post Op-Ed defending the right of banks to be as monstrously huge as they please.
Is that true? Until very recently, modern global economic growth was inseparable from advances in telecommunications and computer networks and transportation technologies that made the world a smaller place and in so doing also made it profoundly easier for smaller entities to find their niche in global production networks. It seems reasonable to assume, unless peak oil crushes globalization beneath its hobnailed boots, that such a trend will continue after the current unpleasantness subsides. Got a computer and broadband access? You are ready to rock, almost wherever you are.
When it is hard to connect one place with another, or one firm with one another, or the user of capital with the provider of capital, then bigness is an advantage. But when such things become easy, where's the size requirement?
To understand the harm of artificially capping the size of financial institutions, consider that some of America's largest companies, which employ millions of Americans, operate around the world. These global enterprises need financial-services partners in China, India, Brazil, South Africa and Russia: partners that can efficiently execute diverse and large-scale transactions; that offer the full range of products and services from loan underwriting and risk management to providing local lines of credit; that can process terabytes of financial data; that can provide financing in the billions.
Dimon argues that efficiencies of scale lower prices. But doesn't competition also lower prices. If a few giant American banks control "the full range of products and services" that America's largest companies need, where does the pressure to keep costs down come from? And do you really have to be a big bank to process terabytes of financial data, or just have access to some big computers? Does it even make sense to depend on one bank for all your credit needs? At the Baseline Scenario James Kwak observes that "the last time Johnson & Johnson issued debt, it used eleven underwriters."
Dimon says banks should be allowed to be as big as they want and that they should also be allowed to fail. That's great. We'd all love to see a big bank allowed to fail when it screws up. The problem, which Dimon avoids addressing head on, is that when a really big bank fails it threatens to take out large swaths of the surrounding landscape along with it. Smaller institutions pose less of a threat. Since it is also easier to be a smaller institution in today's global economy, why fight it?