Where are the snows of yesteryear? Or, for that matter, where are Kuhn Loeb, Dillon Read, Brown Brothers Harriman or any of the myriad investment banks that once were famous on Wall Street but no longer exist? Does it matter?
Lit majors will recognize the questions above as examples of the "ubi sunt" (Latin for "where are?") theme of yearning nostalgia common in literature from the Book of Ecclesiastes through classical and medieval poets to Shakespeare and even Paul Simon. The philosophical question is unanswerable. Maybe our nation really would be better off if we had a hero like Joe DiMaggio to whom we could turn our lonely eyes. Maybe not.
However, the economic issue of whether it matters that important financial companies can fade away is clear. It isn't important at all. The fact that Blackstone, up to now a large investment fund, has gotten a license to underwrite the sale of new securities - the core function of investment banking -demonstrates why.
Companies rise and companies fall, in finance just as in manufacturing or transportation. That shows what Josef Schumpeter, the Austrian-American economist of the first half of the 20th century, had in mind when he described capitalism as a process of "creative destruction." Market forces are inexorable. Some businesses that are efficient in providing valued goods or services grow, and most of those that fail to do so shrink and disappear. Others inevitably spring up in their place.
But what does this have to do with our ongoing economic problems? The answer is that these problems stem in large part from the fact that we let our financial sector become too concentrated, too willing to take on risk and too highly leveraged to be stable. Successive waves of mergers led to a handful of firms becoming so big that if they went bust, the repercussions could throw the whole economy into peril.
This "too big to fail" problem is misunderstood. It is not that the government, either the Treasury or the Federal Reserve, should never step in to prevent the financial collapse of such large firms. There are some that, if left to go bankrupt, really would cause great harm to the general economy.
The lesson is rather to avoid letting firms grow so large as to pose this danger. And if we have failed to do that, the best solution is to break up or shrink them.
This option is getting increasing support from economists and financial experts. Unfortunately, some misinterpret this as an anti-business vendetta by liberals who loathe market forces. This is a mistake. Some of the most articulate advocates of keeping banks small enough to pose little harm are conservatives, both politically and as economists. Even Alan Greenspan, with all his libertarian beliefs, is coming around to this position.
Unfortunately, financial power means political power, particularly in contemporary America. Wall Street long has had enormous influence in Washington. Some of this comes from the conduit that funnels financiers high into the federal bureaucracy.
Henry Stimson, Dean Acheson and John Foster Dulles, Secretaries of State in the Hoover, Truman and Eisenhower administrations respectively, all were Wall Street lawyers whose clients were financial firms. Stimson also was Secretary of War in the Taft and Franklin D. Roosevelt administrations. His proteges, including Averell Harriman, Robert Lovett and John McCloy mimicked him by repeatedly moving back and forth between high-level positions on Wall Street and in Washington.
This is even more pronounced at the Treasury than at State. In the past 52 years, C. Douglas Dillon (Dillon Read), William Simon (Salomon Brothers), Donald Regan (Merrill Lynch), Nicolas Brady (Dillon Read), Robert Rubin (Goldman Sachs) and Henry Paulson (also Goldman Sachs) served as secretary for a combined total of 23 years.
Add David Kennedy, who headed Continental Illinois in Chicago, and financiers held this key post half of the time, much more than nonfinancial corporate CEOs like John Snow, Paul O'Neill and G. William Miller or politicians like Lloyd Bentsen or John Connally. (Also consider the Wall Street ties of Presidents George H.W. Bush, whose father and grandfather both worked for Harriman, and of George W. Bush.)
Then add campaign contributions, given freely to both parties, plus the old college and law school ties at Harvard or Yale for Obama, both Bushes and John F. Kennedy and you appreciate how great a voice big financial institutions have in the halls of power.
Some of the most respected economists and the wisest and most experienced analysts of finance can unite in arguing for actions to reduce the critical mass of any single commercial or investment bank. But their voices are likely to be drowned out, in Democratic administrations and among Democrats in Congress just as surely as under Republican ones, by the powerful tones from the financial sector.
They will argue that their mega-companies are necessary to achieve economies of scale, to compete with large institutions in London or Tokyo and to provide a full range of services for corporate and other customers. Break us up, they say, and the financial firmament will be rent from top to bottom. Break us up, and grass will grow in U.S. factories and cities.
This is not true. Capital flowed quite well decades in the past, when finance was far less concentrated and even the largest firms had a much smaller fraction of the total market than now. And, just as firms like Blackstone can grow from simple investment management companies into investment banks, so can others, especially if we end the favored treatment extended to the biggest score of banks and other financial firms.
Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at firstname.lastname@example.org.