July 22, 2016
Catherine Rampell correctly points out that the Donald Trump Republicans want a nanny state, going through various ways in which they want government to intervene in people’s lives and the economy to make life better for them. You can add some important items that Rampell left out, like stronger and longer copyright and patent monopolies, to redistribute money from people who work to people who own patents and copyrights. They also seem fine with the protectionist barriers that keep our doctors and other highly paid professionals from having to compete with their lower paid counterparts in the developing world or even Western Europe. But she does get one item badly wrong.
Rampell lists breaking up the big banks as an intervention. Actually the opposite is the case.
The reason to break up the big banks is that if their highly paid CEOs push them into bankruptcy through incompetence, the government will invariably bail out them out. The Treasury and/or Fed will give them money at below market interest rates to ensure they survive. Such bailouts will almost certainly always get political support because folks like Rampell’s employers at the Washington Post will furiously denounce anyone who doesn’t support saving the big banks. The opponents will be called all sorts of names and face bleak political prospects if they don’t come through with the money for Wall Street.
Since market actors know that the big banks will be bailed out by the government if they get in trouble the banks can borrow at a lower cost than smaller competitors in the same financial situation. This amounts to a government subsidy to their top executives and shareholders. The I.M.F. and others have estimated the size of this subsidy as being between $25 billion and $50 billion a year. That is not a free market.
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