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Regulation and Its Discontents

"The only thing new in the world is the history you don't know." - Harry S. Truman

I happen to follow a New York Times feed on my Twitter account called “On This Day,” and it is a source of endless fascination to me. It's a screen shot of the front page of the paper from today's date, but going back all the way to the Civil War to the late 90s. This kind of thing has always held my attention.

Usually, they'll pick out three or four front pages from the Times' archive for that day, perhaps a major victory in WWII, a space launch, or the death of a major figure. But that's not what's really interesting to me. So many times, it's the seemingly insignificant articles in the left hand columns where the history isreally made. I came upon the front page shown in the header above for Thursday, February 20, 1991, and the article titled “Reforms in Banking Call For a Shrinking U.S. Role,” immediately caught my attention. This, folks, is history.

A few excerpts:

“The proposals for bank reform are piling up -- from the Bush (Sr.) Administration this month, from Congress in several bills, and from bankers, economists and Government regulators in their numerous public statements. They disagree on many points. But a common ground appears to be emerging, and it is this:

The nation's 12,926 commercial banks should move into a second phase of deregulation, one in which the Government's role as a savior of failing banks through deposit insurance would shrink. The proposals, in fact, focus mainly on how to minimize the next banking crisis -- so the Government will not get stuck with another huge bailout bill -- and not so much on how to restore failing banks to good health in the current crisis."

"A heated debate is developing over the details of this new phase of deregulation -- for example, over which Federal agencies should supervise the banks, how much capital banks should keep on hand to help reimburse depositors in emergencies, whether they should be allowed to sell insurance and who should be allowed to own banks. But virtually every proposal embraces the concept of shrinking Federal deposit insurance, if not all at once, then over a year or two. What opposition there is comes most loudly from small banks, but it appears insufficient to stop the trend."

"Apart from the creation of new categories of banking, there appears to be agreement among Bush Administration officials and key Congressmen on other measures. The McFadden Act would be repealed so that banks would no longer be prohibited from operating across state lines. Banks would also be authorized to branch out, for the first time since the 1930's, into various non-bank businesses, among them financing new stock issues and providing other services now usually prohibited under the Glass-Steagall Act."

"But what if a big private lender fails, or one of the newly created risk operations at a big commercial bank goes under? What if a big insurer like Equitable or a money center bank like Chase Manhattan were unable, because of loan losses, to pay back hundreds of millions of dollars in uninsured deposits in teachers' pension savings, for example, which are often "deposited" at higher rates outside the banking system? Would the Federal Government turn its back?

The answer seems to be no for now."


Well, we all know what happened later. And we can trace, from this article from 1991 to the present day, just how long and how hard the banks lobbied Congress to deregulate their operations, with this preceding the Riegle-Neal Act by three years, and ultimately, the repeal of Glass-Steagall in 1999. There were many smaller and seemingly less significant acts of deregulation in the interim, and afterwards, but the carnage of the coming catastrophe set into motion a movement to re-regulate the banking sector, and restore some of the safeguards and firewalls that had been taken down after decades of arduous effort by the banking sector.

And the banks, despite everything, are complaining. Loudly. And it has brought about an oft told political narrative of regulation "holding the economy back" and "suffocating economic growth." Which regulation, by itself, cannot do. But the banks are not being "over-regulated." They're being RE-REGULATED, and they bear the responsibility for that. We have to make up for nearly two decades of unraveling safeguards in a very short time.

What the banks really want, of course, is the ability to get reckless again, and one would think that the global collapse of the financial sector would have chastened them somewhat. But it hasn't. We don't live in that kind of country anymore. In the immortal words of Jamie Dimon, "Basel III is un-American."

The past really is a foreign country.

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