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Financial Times Letters

Daniel Aronoff

Financial times

FT

Daniel j aronoff

landon companies

Policy has moved in the wrong direction to curb rent seeking/FT 5-29-2015

Letter

May 29, 2015 12:58 am

Policy has moved in the wrong direction to curb rent seeking
From: Mr. Daniel J. Aronoff
Sir,

Martin Wolf agrees with Professor Luigi Zingales’s diagnosis that the ills of contemporary finance are a product of rampant rent-seeking behaviour (“Why finance is too much of a good thing”, May 27); I agree as well.

There are three structural features of finance that enable financial companies to extract profit above the level that would prevail in a competitive industry. The first is concentration, which enables large banks and broker-dealers to charge exceptionally high fees. The second is regulation, which enables incumbent firms to exercise their lobbying clout to “capture” regulators and bend rules — and the enforcement of rules — to their advantage, and to the disadvantage of customers and potential competitors. The third is opacity, which masks rent-seeking behaviour from outsiders in their market and political dealings with banks and other financial institutions.

These three causes of rent seeking suggest three policy responses to cure the problem. Finance should be subjected to antitrust law and large banks and broker-dealers should be broken up into smaller units; finance should be deregulated and financial products should be required to meet certain standards of simplicity and transparency (which, admittedly, requires regulation).

Unfortunately, post-financial crisis regulation has moved in a diametrically opposite direction, at least as to the first two points. The US banking industry is far more concentrated now than it was before the crisis and there has been an explosion of new financial regulations introduced since the crisis. It is unsurprising that big banks have returned to profit. Many policy makers trumpet this as a mark of success. Most of the rest of us are outraged. Prof Zingales has explained why this is so.

Daniel J Aronoff

President, The Landon Companies

Birmingham, MI, US