Marshall Auerback argues that the purpose of banking is not to
make a small number of people fabulously wealthy — but (wow!) to serve
the public good.
It seems odd that days after we were told by Goldman Sachs’s CEO, Lloyd Blankfein, that bankers are doing “God’s work”, we are still having active debates about how to regulate these selfless apostles of capitalism.
The latest foray into financial reform comes from the Senate.
Senator Christopher Dodd will propose creating a single U.S. regulator
that would strip the Federal Reserve and Federal Deposit Insurance
Corp. of bank- supervision authority, according to a report from Bloomberg.
Dodd, according to the Bloomberg report, has faulted the U.S. bank
regulation system, saying “it encourages charter shopping and a ‘race
to the bottom’ by agencies to win oversight roles.” Bloomberg notes
that “his proposal goes further than proposals by President Barack
Obama and House Financial Services Committee Chairman Barney Frank to
merge the OTS and OCC.”
Certainly, almost anything is an improvement over the abomination
that came out of Barney Frank’s committee. But we feel that the ‘race
to the regulatory bottom’ could easily be solved via a simple
mechanism: If you don’t fall in line with our regulatory requirements,
you’re simply denied a banking license to operate in this country.
Problem solved. The United States is the biggest banking market in the
world. Do you think any major bank would willingly vacate this market?
And even if the “too big to fail” behemoths decided to transplant a
bunch of their operations elsewhere, the country would still be left
with thousands of community banks which could fill the void and better
fulfill the public purpose described by Mr Blankfein: namely, to “help
companies to grow by helping them to raise capital”, rather than
extracting their pound of flesh via grotesquely high financial
intermediary fees, as is the case today.
We have argued before
on New Deal 2.0 that the FDIC is best suited to carry on the role of
chief systemic regulator, given its role as deposit insurer. That
regulator has the best institutional incentives to be concerned with
systemic risk and to be a vigorous regulator. It should be the least
subject to regulatory capture (a pervasive problem at the Fed, which is
full of quant economists who have virtually no interaction with other
Fed examiners).
But WHO controls the banks is ultimately less important than HOW we
control the banks’ activities. Oversight is all very nice, but at times
it pays to get back to first principles. What on earth is the public
purpose of these things?
Banks are set up and supported by government for the further benefit
of the macro economy via providing a payments system and lending in a
way that is specifically defined by regulators. Newsflash: the public
purpose of banking is NOT to provide profits per se to shareholders.
Rather, the provision of the ability to earn profits is only a tool used to support the attendant public purpose.
Banks should only be allowed to lend directly to borrowers, and then
service and keep those loans on their own balance sheets. There is no
further public purpose served by selling loans or other financial
assets to third parties, but there are substantial real costs to
government in regulating and supervising those activities. There are
severe consequences for failure to adequately regulate and supervise
those secondary market activities as well.
Banks should be prohibited from engaging in any secondary market
activity because it serves no public purpose and may result in severe
social costs in the case of regulatory and supervisory lapses. Some
argue that these areas might be profitable for the banks, but this is
not a reason to extend government sponsored enterprises into those
areas. Therefore, banks should not be allowed to buy (or sell) credit
default insurance. The public purpose of banking as a public/private
partnership is to allow the private sector to price risk, rather than
have the public sector pricing risk through publicly owned banks.
If a bank instead relies on credit default insurance, then it is
transferring that pricing of risk to a third party, which is counter to
the public purpose of the current public/private banking system. Banks
should not be allowed to engage in proprietary trading or any
profit-making ventures beyond basic lending. If the public sector wants
to venture out of banking for some presumed public purpose it can be
done through other outlets.
If the activities of the banks are not facilitating the production
and movement of real goods and services what public purpose do they
serve? It is clear they have made a small number of people fabulously
wealthy. It is also clear that they have damaged the prospects for
disadvantaged workers in many parts of the world.
It’s more obvious to all of us now that when the system comes
unstuck through the complexity of these transactions and the
impossibility of correctly pricing risk, the real economies across the
globe suffer. The consequences have been devastating in terms of lost
employment and income and lost wealth.
All governments should sign an agreement which would make
all financial transactions that cannot be shown to facilitate funding
for real goods and services illegal. Simple as that. When we
keep these principles at the front of the argument, we can see that
what Senator Dodd and Congressman Frank are arguing about is akin to
how to rearrange the deck chairs on the Titanic.
by Marshall Auerback
Source > New Deal 2.0 | nov 11
Link a questo articolo : http://www.effedieffe.com/content/view/8819/152/
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