Beware: Super-Oligopolies Threaten to Dominate Economy and Democracy

Why do mergers take place? The press releases proclaim synergy and benefit to stockholder and customer. Others suspect personal vanity and greed. We think at least part of the reason is fear of disruption and an attempt to reduce risk from competition. In a way, all of these are all likely reasons.

In the case of the true megamergers, like J.P. Morgan Chase and Bank One, one other factor is critical: being beyond regulation. When banks, for example, as massive and as critical as Citigroup, J.P. Morgan, and Bank of America are or soon will be, they enter a whole new category of institution, with capabilities that merely big companies can only dream of.

These super-oligopolies:

* Become too critical to fail, so that government is forced to support them in the face of serious trouble, even if the trouble is caused by the poor management or even criminal behavior of the executives.

* Become too complex for anyone to understand from the outside, so that lawsuits, regulations, and the financial markets have great difficulty figuring out what is really going on in the company, much less regulating it.

* Gain enormous political power, as legislators in a wide variety of constituencies are anxious about the company's health and well being, leaving out the question on political contributions.

* Manage to get to regulate themselves, with former executives or outside hires (lawyers, accountants, consultants) placed on regulatory and standards boards and legislative drafting committees. Again, the only people who understand the industry are insiders, and insiders are not going to actively cause trouble.

* Rewrite (or cause to be rewritten) the rules of the game so that entities of their size are rewarded, not penalized, and antitrust definitions change to protect them.

* Intimidate or dissuade news groups that are to write critically about them (they'll lose advertising and access) and financial analysts who say bad things about them.

The largest oligopolies in the biggest businesses are becoming just such super-oligopolies. And the extent of their impact is just starting to be felt. For example, the new top three banks will have almost as much influence on the real money supply in the country as the US government, since they are the gatekeepers for massive amount of business and consumer credit. They also have the ability to dispense largesse in the form of fees and contracts. Government policies may have no more effect on the economy than the decisions of these three competitive, but very like-minded companies.

Their choices of where to invest the approximately three trillion dollars of assets that they manage can transform the economy. That's more than the 2003 federal budget, which started at around $2.2 trillion.

Tightening or loosening credit, investing domestically or abroad, backing certain kinds of real estate development rather than others, all have more impact than the Fed deciding to lower or raise the prime rate marginally or the Feds monkeying around with the inheritance tax.

You don't have to get paranoid about an evil agenda to get concerned about the way in which the increasingly massive companies are reaching the status of shadow quasi-governments.

The author operates the website Oligopoly Watch, where this commentary first appeared.

© 2004 Steve Hannaford

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