FDIC offers banks an explicit safety net. Several large institutions also enjoy an implicit safety net because they are “too big to fail” (TBTF). This safety net allows them to borrow money (other than insured deposits) at a lower interest rate than would otherwise be the case because lenders know that the government will back up the institutions’ loans if necessary.The argument is weak because it assumes the "escape net" role of the government in the first place. No argument is given for why the government acts as it does, it is simply assumed to be so. And thus, we may easily arrive at the kinds of conclusions that Baker arrives at in the above quote: it is not about the actual structure of the financial system, it is simply about the size of the relevant players in this system.
Competitive banking is no less an evil, because the problem actually revolves around the scope of these financial institutions. Competition, as Schumpeter argued, will inevitably lead to monopolistic economic units through such processes as creative destruction. To be clearer: an inherent aspect of capitalism is its continual requirement for innovation and technological growth. This necessarily leads to the creation of massive rents for those who do succeed, and leads to the bankruptcy of thousands of others who fail. The means of protection of those rents explains both why capitalism is successful and also why so many fail (i.e., why it contains the possibility of being vary volatile).
Here's another quote that explains Baker's position quite well:
Suppose the state of Nevada waived the 6.75 percent tax on gambling revenues for
one casino in Las Vegas. That casino could promise better odds than its
competitors and still have a larger profit margin. Wall Street financial
institutions essentially enjoy this kind of advantage: they can profit from
gambling opportunities unencumbered by the taxes paid on other forms of
For Baker, it's not about changing the field, it's about levelling the playing field so that the rules are the same for everyone. This is a fundamental misconception about the consequences of macro dynamics in a capitalist economy.
Toward the middle-to-end of the article, Baker shifts his focus from debates over financial competition vs. "too big to fail", to a focus on the benefits of long- vs. short-term investment. In this more Keynesian style of the piece, Baker argues that the short term nature of most investment encourages speculation and a lack of care about public welfare of investment:
If the government sought to level the playing field across casinos, it could
impose a modest tax on each financial transaction. Such a tax would
disproportionately affect noise trading, since short-term traders make more
transactions than long-term investors. And it could lead to more efficient
markets. Not only would fewer resources be wasted in carrying through the
financial transactions that support the real economy, but we might see prices
that more closely reflect the fundamentals of the market.
I'm not sure what to make of this, except that Baker is making an explicit link between government actions and capitalism's health that I do not think exists. Surely capitalists argue as if their system were efficient, but this efficiency is a construct of capitalism's value system. Efficiency arises in financial markets when "fundamentals" are reflected in stock prices. In other words, efficiency means financial conditions reflect the health of the real sector -- which includes industrial profits and other indicators of firm's future profit-making abilities. Baker argues that this can happen with a combination of long-term investments and smaller banks. Baker doesn't explain two things: 1. how competition can be effectively deterred in order to reduce the tendency of all financial institutions to grow; 2. and how how this will reduce the need for a safety net for the firms in the more important industries.
And why hasn't he explained 1 or 2? Simple: by this point in the article (indeed for the rest of it), Baker still hasn't given us an explanatory framework for understanding why the government takes the actions is does. This is very very important to be clear about. The government is not an a priori neutral institution. Many political economists since Adam Smith have argued that laws and state systems are at least partly designed by the dominant and wealthy classes, for the interests of these groups. Therefore the more important issue is how the state itself operates -- will it be a neutral body, or controlled by some employers and other industry interests?
By the way -- What's this mean?
In many cases customers were either not aware of the fees or they did not
realize how damaging they would be. Customers are frequently charged fees about
which they have never been clearly notified. For example, it is now standard
practice for banks to provide overdraft protection on debit cards, whereby the
bank will cover the cost of a purchase even if it exceeds the money available in
the customer’s account. The fee is typically six to ten dollars, so debit-card
users may find themselves paying a six-dollar overdraft fee to buy a two-dollar
cup of coffee.
Hyperbole. The reader has idea how realistic this claim is. It's just another example Baker can use for how the "government helps business" -- how convenient of an argument, especially when you don't have to explain how the help arises!
And to finish, to feed my summary:
The debate must be returned to appropriate grounds: a question of how best to
structure regulation. Which regulations structure the financial industry so that
it will serve the larger economy? This means providing incentives for the
industry to better serve consumers and investors, rather than providing
incentives to prey on them. There should not be large returns for writing
deceptive contracts. Nor should short-term speculation be the most effective way
to get rich.
Dean Baker operates under the conception that the state plays a passive role in the operation of any economy. To the contrary, state institutions, especially regulatory frameworks, play extremely active roles in the success (and failure) of economic trajectories. Without a reliable theory of why government provides the kind of regulations it does, Baker doesn't go far enough in his policy prescriptions of the economy. We are left with a situation where the carrots and sticks are rearranged while the environment itself is left untouched.