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Don’t blame greed, blame deregulation

There have been a number of alarming headlines concerning the banks these past couple of months.  Here are some highlights:

  • JP Morgan’s already colossal loss of $2 billion turned out to be an even bigger and deeper loss of $6 billion.
  • Barclay’s admitted to fixing the London Interbank Offered Rate.
  • HSBC is under investigation for money laundering on behalf of drug cartels and terror groups (for the third time)!
  • Capital One admitted to, and paid a fine for, deceptive credit card marketing.

All of this develops as Americans continue to feel the shock-waves of the sub-prime mortgage crisis. Still a fresh memory are the federal bailouts the banks received (compliments of the American tax-payer) with no strings attached.  You would think the banks would want to clean up their image.

What’s going on here?  Can we chalk all of this up to greed?  Sort of, but that doesn’t explain a whole lot.  Bankers have always been greedy, yet banks rarely dominate the headlines with such scandal and corruption (you can’t explain a variant with a constant).  So, what’s really going on.

The answer lies in banking regulation. Starting in the late 1970s, a culture of financial deregulation dominated American policy.  Over time, we chipped away at laws regulating banks. Below is a chart relating banking regulations to bank failures.

Bank Failures Over Time

Notice how government regulations made for a more stable financial sector. However, deregulation made it more risky and more prone to bank failures.  As a result, mergers dominated the industry as big banks swallowed smaller ones to reduce competition.  Below is a chart illustrating the rise of mergers.

Our banking system is so concentrated that the top 10 largest banks hold more than half of the nation’s assets.

Deregulating the banking system not only made it riskier and less competitive, but it also made it politically powerful.  Mergers lobby for more deregulation and tax breaks, allowing banks to make more money, making them even more politically powerful…and the cycle continues.

In other words, government needs to impose the right kind of rules to encourage the right kind of behavior.  We need more oversight to prevent interest rate fixing.  We need to restore Glass-Steagal, which separates commercial banking from investment banking.  We need to use the anti-trust laws to break up banks that have grown “too big to fail”.

What seems like a banking culture of corruption and greed is a sign that we need more regulation, not less.

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