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.

Another problem with Posner’s argument is that it ignores industries where prices have gone down, such as software, toys, automobiles, household furnishings, mobile-phone services, technology and clothing. These companies have had the same increase in index-fund ownership as banks and airlines, and in many cases they have had increased market concentration — and yet their prices have fallen.

The other question that isn’t addressed is that for indexers to have encouraged anticompetitive behavior would have required them to engage in a criminal conspiracy to restrain trade and fix prices. Yet no one even tries to make this assertion, nor is there any evidence that investigators have uncovered anything like it.

To accept the Posner thesis one would have to believe Vanguard, BlackRock and State Street are going to throw out their investment philosophy, ignore their fiduciary obligations to their investors and risk vast reputational harm so that some of the thousands of companies they hold a stake in can raise prices and reduce competition.

Long before indexing became popular, many actively managed mutual funds held the same companies. Recall the popular “Nifty Fifty” stocks of the 1960s, which every money-management firm of that era seemed to own? And yet, no evidence of anticompetitive activity has been found to have been caused by having similar large fund ownership back then.

Market concentration may very well be a problem for the economy in some industries, causing harm to consumers. But researchers, analysts and critics of index investing would be providing a much more valuable service by critiquing America’s lax antitrust regime of the past 30 years than the money-saving brainchild of Jack Bogle.

This column was provided by Bloomberg News.

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