On banking and the economic crisis

This letter of mine appeared in the Albuquerque Business Journal on Monday:

I read with great interest Winthrop Quigley’s recent column on the anxiety New Mexico’s small bankers are having in relation to the latest, costly regulation coming from Washington.

Most salient was the point made by Lordsburg banker Michael Martin who has concerns about compliance costs and worries that smaller banks with small legal staffs are less able to comply with reams of new regulations than are some of America’s banking behemoths. This is the single biggest issue with all government regulations and it is why Dodd-Frank, far from solving the “too big to fail” problem will actually exacerbate the issue.

Of course, these regulations come on top of untold billions of dollars in bailouts provided by the federal government to the big banks that did so much (along with Fannie and Freddie which are left unaddressed in Dodd-Frank) to cause the current financial crisis.

When it comes to picking winners and losers, governments have a long track record of doing a terrible job. The Solyndra solar subsidy scandal and the banking bailout boondoggle illustrate the top-down, statist thinking that has kept the US economy in the doldrums for more than four years now.

The most important “law” in Washington is the law of unintended consequences. At least, I hope they are unintended, but it surely seems that when the left in particular desires some government action, the result has the opposite result of what was originally intended.

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One Reply to “On banking and the economic crisis”

  1. Absolutely, the opposite…each and every time.

    The law of unintended consequences is always forgotten by Washington, and at the same time, our head-bankers (the Fed) have completely forgotten about the unintended consequences of exceeding the law of diminishing returns.

    The concept of diminishing returns can be applied to various returns, including those associated with efficiencies of scale and total manageability, and there has now been more than a full decade long campaign dedicated to the growth and consolidation of U.S. banks. Theoretically, global competition and leadership would require a move towards world-class competitive economies of scale. And suddenly, voilà…the bigger they are, the harder the fall, or, is it: too-big-to-fail, the bigger the required bailout…and more consolidations…who really knows?

    Unfortunately, when compared the 90’s bank consolidations, government had a very heavy hand in this more recent bank/investment house culling and consolidation process.

    And meanwhile, our same government continues to wield its incentives and the invisible hand of self-interests in order to slap the public and our smaller and more localized community bankers and businesses from every conceivable angle. A more detailed look over the past decade of banking actually tells quite the story of how the little guys have been intentionally boxed out over time, in the U.S.

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