Index Funds Don’t Hurt Consumers, But Monopolies Do
Critics of passive investing blame the wrong thing for higher prices in some industries.
Bloomberg, May 14, 2019
As we discussed yesterday, there are some who have aligned against indexing with a novel theory that this somehow works against consumers and competition. The examples used were price increases for Airlines and Banks. The assumption is this is caused by indexing and not by other factors.
This is a failing argument from academics and lawyers, who are apparently unfamiliar with what impacts prices in the real world:
“Posner cites the airline and banking sectors as examples of where prices have gone up as “common ownership” has increased.
Here’s one big problem with Posner’s analysis: he cited two industries that have seen notable price increases while ignoring the reasons those prices rose.
Let’s start with the airline industry. During the past 15 years, the 10 major U.S. airlines have been merged into four carriers, eliminating unprofitable and non-viable rivals. This has indeed reduced competition and has led to price increases.
This is exactly what the textbooks say we should expect.
Consolidation in the banking industry, especially since the financial crisis, has been even more dramatic. In 1990, the five largest U.S. banks held less than 10% of industry assets; by 2000, it had doubled to more than 20%; as of last year, the five biggest banks held nearly half of all assets in America. What’s driven this industry concentration? Blame bank rescues and shotgun marriages, but more importantly an easing of regulations that since the 19th century had imposed inefficiency and fragmentation on America’s banking industry. Once those regulations were lifted the result was mergers and acquisitions, reduced competition and increased prices.
And what was passive indexing’s role in this process? Posner doesn’t identify it, but I can: precisely zero.”
The rest of the column is just as analytical in dismissing this frippery. Go read the whole thing here.
Previously:
Why Would Indexers Become Anti-Competitive Monopolists? (May 14, 2019)
Index funds Are the Root of All Evil (December 19, 2018)
Active Management (various)
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I originally published this at Bloomberg, May 14, 2019. All of my Bloomberg columns can be found here and here.
