04 March 2009

Four Banks Rule Them All

Paul Krugman aptly notes that despite the immense size of the U.S. economy, our banking industry is remarkably concentrated.

The four biggest US commercial banks – JPMorgan Chase, Citigroup, Bank of America and Wells Fargo – possess 64 per cent of the assets of US commercial banks[.]

Two of those banks trace their roots to New York City, the other two trace their roots to San Francisco.

I suspect that the top ten commercial banks in the U.S. would hold close to three-quarters of the assets of U.S. commercial banks.

Krugman notes that given the great concentration of banking assets, nationalizing banks on the Swedish model is less far fetched than it might appear. He doesn't mention the fact, but Citigroup's shareholders have almost been wiped out already. And, there may be no party other than the federal government big enough to acquire one of these huge institutions right now in the financial markets, other than the Federal Reserve.

This high level of concentration also helps explain some remarkable charts showing unemployment rates by county, that NewMexiKen called attention to in a post.

Unemployment rates, at the county level, and even at the state level, vary a great deal. Michigan and the better part of the territory of the 9th Circuit Court of Appeal have more than 10% unemployment rates with patches of unemployment rates of 15% or worse. The Great Plains are virtually unscathed with much of the area having unemployment rates under 4%. The Great Recession will not include a dust bowl.

A large share of the worst hit counties are either counties with manufacturing oriented economies, or counties which had housing bubbles. Interestingly, there are only a handful out of 3,000+ counties in the nation which are in both categories. Grain and coal oriented county economies were virtually untouched, and financial centers have suffered remarkably low employment impacts considering that big financial institutions are believed to be at the heart of the current crisis. For example, upstate New York has been harder hit than New York City.

Colorado has just one county (Mesa County, home to Grand Junction, Colorado which is a regional center on the Western Slope that serves the oil and gas economy) which saw housing prices rise to at least 175% of 2000 levels (Denver's housing price increase was has been roughly equal to the rate of inflation in that time period), and has not a single county where at least 25% of earnings from 1998-2000 came from manufacturing. Not surprisingly then, Colorado has been one of the states least hard hit by the financial crisis.

Heuristically, it is reasonable to believe that the collapse of the housing bubble, which took place almost entirely on the Pacific coastline, the Atlantic Coastline and Florida's Gulf Coast, created unemployment by killing the local construction industry and also led to a national shortage of credit. This national shortage of credit, in turn, reduced demand for manufactured products, which caused unemployment in places that manufacture goods.

Housing bubble collapses largely continued to a handful of states have been able to dry up credit nationally, because so much available credit was controlled by a small number of big investment and commercial banks. In a less centralized economy, we would presume that California and Florida banks would be going under left and right, while Nebraska and Colorado banks would be sitting pretty, minimizing the national impact of what are really localized real estate problems.

The other thing that the maps show which is surprising is the geography of the American manufacturing economy. Everybody knows that the "rust belt" extending from Pittsburgh to a swath of territory more or less along the Great Lakes is a hub of American manufacturing. What is less widely known is that the South now has a "new rust belt" made up mostly of rural counties of the South's Hill Country. Manufacturing is a relatively unimportant part of the vast majority of counties West of the Mississippi.

The limited unemployment impact in financial centers may flow from the fact that a fairly small number of people generate most of the wealth in these cities. Something like one in seven employees in New York City works in finance, but that sector generates a grossly disproportionate share of the city's income. And, many laid off financial workers are not unemployable, even though the most valuable application of their knowledge, skills and abilities is in finance. A lawyer who used to do billion dollar merger and acquisition deals can do divorces if he must. Stock brokers are capable of selling refrigerators too. In contrast, many construction workers and factory workers have few alternatives when work dries up in their ordinary occupation.

If you are a state legislator in Tennessee or Mississippi or Alabama, each of which has a vibrant manufacturing economy and mostly sensible, stable housing prices, it has to be infuriating that your state's economy is in the tank as a consequence of bad mortgage lending practices in California, Nevada, Arizona and Florida which are completely beyond your control, largely as a result of decisions made by banks being run in New York City and San Francisco.

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