For many years, the Antitrust Division of the Justice Department has been a paper tiger (to use a Maoist phrase), but now it faces an opportunity in the new administration. AIG is the perfect opening. Few will deny that American Insurance Group has used its monopoly power in the marketplace for ill, and the bonuses taken out of bailout money illustrate the nature of the problem: the outrage is justified.
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The Clinton administration used the Division somewhat more assertively than Bush, who settled the Clinton administration's outstanding suit against Microsoft on the company's terms. One of the reasons for the generation-long timidity: conservative economists, like Fred McChesney ["Antitrust," Library of Economics and Liberty], have discouraged enforcement of the law (going back to the Sherman Antitrust Act of 1890), arguing that it is not justified in economic terms. This went along with the conservative, pro-corporate inclinations of Republicans since Reagan, and of some Clinton "new" Democrats.
It's a position that is no longer appropriate. McChesney argues that monopolies, price-fixing, vertical mergers and horizontal mergers are all economically justified, i.e. are "usually" entered into to increase economic efficiency, and are therefore good. In fact, according to McChesney, all
antitrust
law does is to raise the costs of companies that are striving for greater efficiencies.
This is a classic case of economists wearing Economics blinders. He and other economists make the empirical case that corporate behavior interpreted as anti-competitive in the law, is economically benign, because it doesn’t raise costs, and may lower them.
But that doesn't mean monopolies or huge oligopolies are a social or political good, or are good for the markets overall.
The cases of AIG, and of corporations "too big to fail," like CITI and GM, bring up a wholly different reason why antitrust law should be used, as a tool, to rationalize the out of control markets. AIG has become a malign monopoly that has so far soaked up $173 billion of government bailout money--and may need more. And it acted like an arrogant monopoly when it paid out $165 million in bonuses with TARP money. CITI also looks like a black hole, despite short-term profits, because of its huge liabilities. Both are 'too big to fail." That means they can blackmail the government to support them.
Both, and many similar corporations, need to be broken up into smaller entities, so that the market can again discipline corporate behavior; it can't now. Now, the biggest corporations in banking and insurance are too big to fail, and therefore are not subject to ordinary market discipline, because they know they'll be bailed out if they get in too far over their heads. That knowledge encouraged the risky behavior (or fraud) that swelled the mortgage security market to many times its real size, all based on risk that none of the co-conspirators wanted to accurately assess (junk mortgage bonds rated as AAA, for example).
If firms were smaller, and knew that they could go bankrupt if they overreached, they would be more cautious; we would not have risen on the house of cards made from securitized mortgage bonds and default swaps that finally, inevitably, collapsed. But didn't AIG know it was running incredible risks? Its high-flyers knew it was too big to fail; the government, or the Fed, would bail them out.
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Obama's nominee to lead the Antitrust Division, Christine Varney, rejects the economist's view that antitrust is not needed. She intends to pursue horizontal mergers and said of the financial sector in her confirmation hearing in March, 2009, “It is time to take a fresh look at what standards we use to measure consolidation and concentration in the financial markets.”
In the case of AIG, her Division should work with the Treasury to determine how it should be sliced and diced, once the immediate financial crisis is over. It could also investigate more immediately whether the guarantee of bonuses by AIG constituted "monopoly behavior." After all, a firm in a competitive market would not issue contracts of guaranteed performance bonuses for the coming year. But the managers concluded that there was no future risk, ergo the bonuses written in stone, precisely because they had no real competition.
Politically, socially, if not economically, monopolies ought, either, to be very closely regulated--they can be very efficient if prevented from unduly profiting from their position--or broken up into smaller, competing firms. AIG would be a prime candidate for the latter--quite a few smaller firms, maybe on the model of the breakup of the Standard Oil Trust into a variety of oil companies (Esso and Mobil (later merging as Exxon), Chevron, Gulf and so on), supposedly competitors.
As for the other "too big to fail" corporations, the ones capitalized heavily by the government, the government should examine how they should be reorganized, to prevent the necessity of bailouts recurring. The political system, as ultimate source of emergency capital, has to have tools for re-configuring the corporate landscape. Otherwise, with every downturn, there will be firms, in finance especially, that will have to be bailed out; drastic changes must be made.
A lot of this policy is within the purview of the Antitrust Division of the US Justice Department. I hope Ms Varney will at least bring the division back to the business of enforcement. In these times, even more is needed: an expansive view of antitrust, to help whip the economy back into shape.
If the Antitrust division can help to restructure the corporate mess that got us into this depression (which may or may not become a Depression), then the efforts of pumping up the economy won't just lead to another huge collapse down the road.
If the market is not restructured, then Obama will only have led us on a short detour, merely delaying the kind of collapse prefigured in Rome's fall in 476.
