Nothing gets the liberal press’s pom-poms twirling like the threat of bank regulation. Ever since the financial crisis in 2008 and subsequent bailout of Wall Street, progressive pols have had their sights set on the banking class. The animosity makes sense: when taxpayers are fleeced to pay for the mistakes of the affluent, it provides great voter fodder. Populist, pitchfork-driven political campaigns go all the way back to the days of the Roman Empire. They are a recurring theme in governing as they appeal directly to one of the seven deadly sins: envy. And there is nothing more enviable than bankers swimming in cash that was swiped from individuals living paycheck-to-paycheck.
Recently in the digital pages of Slate magazine, the ever-sardonic Dave Weigel celebrated Ohio Senator Sherrod Brown’s likely appointment as Chairman of the Banking Committee. In an interview with USA Today, Brown told the reporter that his colleagues “know I want to be chairman.” With the chairmanship in hand, Brown wants to pursue an agenda of extending affordable housing to the poor and “cracking down on risky financial practices.” And without missing a beat, he admitted to an alternative goal, telling the paper: “The damage that Wall Street did to the country leading up to ’08 … the country’s been paying for ever since.” That’s a dog whistle phrase for a seek-and-destroy mission of, as Keynes put it, euthanizing the rentier class.
Brown’s rhetoric and potential appointment are understandably drawing some ire from lobbyists in the financial sector. Financial consultant Tony Fratto says Brown “has radical views on what the banking sector should look like” and the he wishes to “break up large American banks and put them at a competitive disadvantage.” One of these radical measures includes a bill Brown co-sponsored that would require banks with more than half a billion in assets to hold at least 15% in capital. As Weigel sarcastically notes, the same bill is co-sponsored by conservative Senator David Vitter, and it’s unlikely “he’d endorse some radical Marxism on the way” to running for governor of Louisiana.
Requiring banks to carry more capital is a policy that garners support on both sides of the political aisle. Conservatives see it as a prudent measure to clamp down on overzealous speculation. Liberals hate profits in general, and see bankers and lenders as predatory tyrants keeping the little guy down. Any measure that limits the profit margin of a corporation is seen as a victory.
Weigel cites numerous polls that show a desire on the part of the public to clamp down on risky lending by banks. Given that the financial crisis was caused by unstable investment in mortgage-backed securities, straightforward reasoning would seem to say more rigorous capital requirements are a good thing. It’s not a totally incorrect conclusion; the problem is Sen. Brown’s proposal doesn’t nearly go far enough. The measure to require banks to hold at least 15% of capital is but a finger in the hole of a slowly cracking dam. The entire structure of the banking system sits on a mountain of sand and a measly increase in holding capital won’t fix it.
The real culprits of the financial crisis, and practically every systematic recession going back hundreds of years, aren’t a bunch of over-caffeinated traders sitting in cramped cubicles. The only reason money flows into various sectors of the economy is because of a source: a central bank and fractional reserve banking. Without the power of the printing press and authority to create money out of thin air, the business cycle would largely cease. Loads of freshly created cash wouldn’t be injected into popular commodities or assets. The banking system wouldn’t be constantly teetering on the edge of insolvency.
By loaning out funds that don’t actually exist, banks leave themselves open to runs on their physical reserves. Sen. Brown’s bill would force bankers to keep more of their capital on the books to better ensure the threshold of insolvency isn’t breached. That tiny measure by itself just begs the question: if keeping a slight bit more capital on hand is good, why not go all the way and ensure that no money is created out of nothing?
Brown’s bill hardly lays a finger on untrampled fractional reserve banking. Even worse, it doesn’t do a thing to stop the Federal Reserve from continuing to pump tens of billions of dollars into the economy every month. This new money, which is created when the Fed buys a mix of treasuries and mortgage securities, is flooding into Wall Street, expanding the edifice upon which increasing amounts of credit can be pyramided. If fractional reserve banking is a disease, then central banking is the infectious germ to blame.
In principle, the act of requiring banks to hold more capital is a step in the right direction. But when government is at the helm of regulation, there is always chicanery afoot. New laws are almost always backed by large interests looking to flout their competition. In the depths of the Great Depression, Congress passed and Franklin Roosevelt signed into law a bank holiday law, forcefully closing banks and preventing citizens from retrieving their cash. The measure is still heralded by historians as a wonderful use of government power. Roosevelt and his New Deal functionaries used the bought time to “stabilize” the banking sector. In reality, it was a favor to bankers who saw the solvency of their institutions in danger.
The same goes for the much-heralded Dodd-Frank Wall Street Reform and Consumer Protection Act. Passed in the height of outrage over the TARP bailout, the measure was supposed to prevent another banking collapse. As Tim Carney reports, the law has done nothing to limit the size of banks. It has only succeeded in crushing small-time competition while empowering large banks that can afford an army of lawyers to avoid penalties. Risky speculation has not been curbed. The big banks at the heart of the financial crisis are even bigger than before. Dodd-Frank did nothing to punish Wall Street, and everything to encourage its appetite for money creation and lending.
There is no indication Sen. Brown’s bill will pass. And the chances he will be a sheriff who cracks down on Wall Street as Chairman of the Banking Committee are as slim as John McCain calling for the abolishment of the U.S. Empire. As economist Frank Shostak points out, “the introduction of new regulations…cannot make the current monetary system stable and prevent financial upheavals.” Nothing short of abolishing the central bank and outlawing fractional reserve banking will stop banking crises. Government regulation is always a cheap term for cartelization. The same talking heads who clap like seals over regulation are the ones who have investments that profit from the outcome. It’s a rigged game, and the winners are always the same.