Today’s Courier Herald Column:
Two weeks ago, the FDIC seized the 21st and 22nd banks in Georgia this year. The state has the dubious distinction of accounting for one of every four bank failures in 2011, and has had the most failed banks since the housing market crashed in 2008. These are mostly smaller, community based institutions. For many Georgia communities, however, they were the only financial institutions.
Larger troubled banks were rescued by TARP and other Fed actions, as they have been deemed “to big to fail”. Most of these larger banks have resumed somewhat normal operations, including large bonus payouts to senior executives and traders within their investment banking units. The frustration over these banks creating credit default swaps and leveraging FDIC insured deposits against highly speculative financial transactions, ultimately costing taxpayers trillions, has fueled anger behind both TEA Party activists and the Occupy Wall Street crowd.
The response to this anger was an attempt to reign in and regulate the “wild west” parts of Wall Street resulted in Dodd-Frank, a complex and cumbersome bill which continues to distort financial markets without necessarily adding any great degrees of consumer or taxpayer protections. Dodd-Frank should be repealed. At the same time, so should the Gramm-Leach-Bliley Act of 1999.
Gramm-Leech-Bliley repealed the parts of the depression era Glass-Steagall Act which separated investment banking from commercial banking. The bill was designed to ensure American financial institutions were competitive in world financial markets. The result has been to allow large financial institutions a conduit to turn consumers’ safe FDIC insured deposits into more risky financial instruments, which not so coincidentally generate more fee income for the bank.
This is what has also allowed the U.S. financial system to truly morph into one where a small number of financial companies have become so vital to our economic interests that they must be saved at all costs. Their very existence now institutionalizes a system that privatizes profits while socializes losses. This is not capitalism.
Some major Wall Street players are now calling for the too big to fail banks to be broken up. Their problem is not their size, however. Commercial banks are generally highly regulated, and the larger a bank is, the more regulatory scrutiny they receive. The regulatory system served this country well through decades of economic growth until commercial banks morphed into the first rung of the ladder for investment banks.
As I was exiting banking in the mid-1990’s, branch personnel were being trained to call large depositors and ask them to meet with our brokerage representatives. We then became licensed to sell mutual funds directly from the bank. We quite literally were converting bank deposits – funds which are required by bank charter to be loaned within the community the bank serves – into investment vehicles that would deploy capital worldwide.
This phenomenon favors both larger banks and the largest of companies which can tap into Wall Street credit grade financing. Small companies, needing ready capital to grow, were denied capital as banks no longer needed to deploy as much of their deposit base locally.
It took less than 20 years to turn the highly regulated, highly functional United States banking system from the world’s safe haven to one which nearly collapsed most western financial institutions.
We continue to feel the lingering effects with the U.S. housing market still trying to find a bottom and the European banking system continuing to identify and unwind their similar issues.
During the great depression, Glass-Steagall was the solution to take banks which were making speculative loans and reign them in to safe, transparent, and regulated institutions. After the 2008 collapse, Dodd-Frank became the solution. It was unnecessary and overly burdensome, however.
Repealing Dodd-Frank can allow banks, commercial and investment, to return to doing what they do best without bureaucrats making business decisions for them. But repealing Graham-Leech-Bliley would ensure that the part of banks that are insured by taxpayers continue to be highly regulated, but detached from the much riskier transactions undertaken by Wall Street.
Dodd-Frank should be repealed, but in exchange, Glass-Steagall must be restored.