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The completely mind-blowing story “A Mortgage Tornado Warning, Unheeded,” by Gretchen Morgenson in the Feb. 4 New York Times, along with a ProPublica story a couple of weeks back on how Freddie Mac had placed multibillion dollar bets for years that paid off if homeowners stayed trapped in bad mortgages, are major reminders of the need to conduct full-scale investigations of the fraud perpetrated by big financial institutions. It’s a Jupiter-sized reminder of the need to staff up the new financial fraud task force, take the road blocks to effective investigations down, and be wary of a soft settlement on robo-signing.  

Beyond those more immediate issues, though, is a far more fundamental reminder about the nature of power. When a company, and an industry, become too powerful (either in the marketplace, in the political world, or both), corruption is inevitable. The big players start to believe they can act with impunity, that they can intimidate people and break the law at will, and it will never come back to hurt them. They always assume that because of their power, they will never be caught or called out for bad behavior, and that if they are, there are plenty of ways to avoid pain: public relations people to make the bad behavior sound not so bad, lobbyists to help them change inconvenient laws, pliant regulators who will look the other way or change the rules for them, minor fines with no admission of guilt (almost always paid for by stockholders instead of the guilty party) if worse comes to worse, and bailouts by the Federal Reserve or taxpayers if the whole financial system goes down.

What we have learned with the banking meltdown is once this kind of corruption takes root in a company or a small set of companies, it keeps growing and growing until it infects not just the corporation or corporations involved, but, as in the financial system’s case in the last decade, the entire industry. In any honest book that has been done in the past four years on what happened, and there have been plenty of them, you get exactly the same story: a system utterly corrupted and out of control. The good risk managers were fired or demoted, on-target analysis (like the internal Fannie Mae legal memo Morgenson cites in her piece) was ignored, the traders trying to stay on the straight and narrow were marginalized. Everyone who raised red flags about what was going on — and there were actually plenty of them — were cast aside and laughed at. The entire culture of the industry became so deeply warped that at least in some ways, some of these companies started to operate as though fraud — multiplied several different ways — was built into the business model.  

One of the foundational cornerstone ideas this country was based on was the idea of pluralism — that distributed power, checks and balances, were essential to building a democratic republic. A lot of the conventional wisdom on that fundamental idea, though was overly focused on distributed power in the workings of government alone. But founders like Madison, Jay, and Jefferson were not thinking only about government when they wrote about pluralism. They knew that if any one private interest, any one section of the country, any one business or industry, became too big and powerful, it would warp everything else. If the plantation owners of Virginia, the merchants of Boston, the Anglican Church leadership, the sea-going trading industry, or the bankers in New York got too powerful and dominated everyone else, our democracy would become warped and twisted up, and we would be in a world of trouble.

Not in everything, but definitely in this, the founders were right. The financial industry got too powerful, and they assumed and operated as if they were above the law. And the rest of us paid a huge price, and are paying it still. Not all bankers are bad people, but the system itself became corrupted by too much power, and when the system itself is rotten, the good people will be driven out, or will become worse themselves. That is why, for the sake of all of us including the bankers themselves (for I do worry about their souls), the system needs to be disinfected: the bankers that egregiously broke the law need to go to jail (making that financial fraud task force the president appointed incredibly important), and the big banks desperately need to be broken up into smaller companies that are not too big to fail.

Here’s the thing, though, because I admit I tend to have become very focused on banking since Wall Street took down our economy: it’s not just banking. Read this incredibly important and truly scary article by Barry Lynn in Harper’s. Growing monopoly or oligopoly power in industry after industry is killing off small businesses, entrepreneurialism, competition, and our democracy itself. Massive conglomerates are buying up or destroying their competitors, and using their power to dictate terms to everyone else. And for way too long our government has been passively letting it happen, or even encouraging it to happen: anti-trust laws are weakly enforced, small businesses are allowed to go out business in massive numbers, unions are broken, new technologies are not allowed on the market. Once the competition, and any check on industry power, is destroyed and one or just a few companies dominate a market so completely, corruption can’t help but set in. When a company or industry has that much power, sooner or later it is inevitable that it will be abused.

Ironically, this is one area where progressives and most of the business community — all those small businesses desperately trying to stay alive in the face of industry concentration — should be in absolute alignment. Progressives believe in a true, vibrant free-market economy, where competition flourishes, entrepreneurs innovate, and consumers have plenty of different choices. From the 1930s to the 1970s, this country encouraged that kind of competition, and partly as a result, this country, especially our middle class, was the most prosperous the world has ever seen.

Too much power creates a heart of darkness, whether for an individual or a corporation. We need to restore a country where true competition and distributed power flourish.

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