February 29, 2012
The Washington Post told readers that local government officials complained about the monopolistic nature of U.S. financial markets in an article on the Volcker Rule. The article reported that a number of local government officials complained that the Volcker Rule would force them to pay higher interest rates on their bond issues.
While the article never discussed the issue of monopolistic markets, this is what the complaints by these officials imply. If the markets were highly competitive, then it would make very little difference whether or not banks opted to buy the debt they issued. Even a small increase in interest rates would cause other investors to swoop in and grab up their debt.
Also, if the financial system were reasonably competitive, we would expect that independent investment banks — which are not subject to the Volcker Rule — would be created to take advantage of these high yielding bonds, bringing up their price and pulling interest rates down.
The article should have asked the question of why, if these local government officials are correct in what they claim, financial markets are not working as they are supposed to.
Comments