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Small Banks, Small Government

November 10, 2010

In a Politico op-ed this morning, Elizabeth Warren notes the disadvantages experienced by small banks and credit unions:

Community banks and other small institutions build their businesses on long-term customer relationships. They worry a lot about dissatisfied customers and a tarnished hometown reputation. But the bankers I have talked with must compete with lenders who have been less reluctant to offer one price upfront and then re-price the product later on.

One Ohio banker forcefully explained that his bank didn’t believe in pricing tricks, but that he had to compete with lenders who do — and who sell products that often appear to be cheaper. From his perspective, real competition in the credit market is less about who makes the best product and more about who can hide costs from the customer until it is too late.

Thus, while small banks have “dissatisfied customers” and a “tarnished hometown reputation” to worry about, their larger competitors answer solely to government regulators. It is true that, in the laissez-faire utopia of the conservative imagination, shareholders would impose “free market discipline” by rewarding banks that make wise lending decisions and allowing imprudent banks to fail. In the actual world, however, power follows property, with the result that, so long income inequality remains at record high levels, trusting markets to self-regulate is naive and unrealistic: the rich will retain their stranglehold on the political system, privatizing gains and socializing losses.

Policies that favor small over big banks (e.g. breaking up the latter) would do much to reduce the need for government bureaucracy, and should therefore be embraced by conservatives. Then again, most conservatives have very little interest in small government.

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