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Banks are important, but they don’t carry out God’s work

Frank Keating, CEO of the American Bankers Association, appeared on Bloomberg’s “Market Makers” the other day to talk about the frequency of banking scandals and the impact of regulation on the financial sector. He didn’t have too much to say about the recent scandals and took plenty of time to criticize government regulation and business uncertainty.

When asked about the recurrence of scandals and the lack of trust in the industry, Keating conceded that these factors do hurt the business of the small banks, but he backwardly accused regulations (specifically Dodd-Frank) as making it even harder for smaller banks to compete in the industry!

First, small banks have always had trouble competing with larger ones.  As I demonstrated earlier this month, the number of big mergers proliferated under our contemporary culture of deregulation.

See how forty banks have been consolidated into 4 big ones.

Second, Keating obfuscates the issue by shifting the blame on Dodd-Frank (He claims Dodd-Frank is making it harder for small banks to compete. I’m not sure where he’s getting this from, but Dodd-Frank’s increased transparency of derivatives as well as it’s inclusion of the Volcker Rule is, actually, a small step in making a level playing field in an industry dominated by mergers).  Yet, he ignores the deleterious role that unregulated big banks play in unfairly damaging smaller banks.  Talk about putting the carriage before the horse.

Logical fallacy is followed by hyperbole when he justifies his stance that “free markets work, capitalism works”, which is to imply that Dodd-Frank is a an oppressive form of socialism.

Spare me.

Banks do serve an important function in the economy as far as raising capital and generating wealth.  This, of course, creates jobs, spurs technology and innovation, and increases our quality of life.  We should recognize the importance of banks as far as they perform these basic functions.  However, fealty to the banks blinds us from the deleterious effects of deregulation.

A while back, Goldman Sachs CEO Lloyd Blankfein declared that he was “doing God’s work.”  U.S. Representative Spencer Bachus publicly stated that “Congress exists to serve the banks.”  Brian Griffith, former advisor to Margaret Thatcher defended the giant paycheck for banks saying “We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all.”

Recognizing the importance of banks is important.  Blind faith in them is dangerous.

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