Overregulating America

11 November 2018

Overregulation of banks in the United States has kept them homogenous to each other, and unable to have a strategic edge or a unique quality comparing to other banking institutions. The overregulation is due to the 08 crises and has scared governmental officials for years to give banks leeway in big time risk decisions, thus holding back their potential. The 08 crises is one of the most detrimental affects on our economy as a whole, which led to be the largest and most financial jeopardy that our economy has been through, since the Great Depression. Not only did it nearly destroy our economic framework, but it also reshaped the world of finance and investment banking all together. Even though a decade has passed since the crisis occurred, doesn’t mean we are out of the woods yet. The effects are still being felt today, yet many people do not fully understand the specifics of what really happened during the crash. In the late 1990s and early 2000s, there was a high demand and purchasing of insurance bonds, being leveled with mortgages called mortgage-backed securities or MBS for short. The reason for this booming of insurance bonds being purchased, was because they have never been cheaper, so the public basically bought up so many insurance bonds, without knowing exactly what they’re getting themselves into. So basically, doing this, overflowed with bonds being purchased triggered the epidemic for what is known as the 08 crises. Investment bankers had a large role in this as well. They would buy mortgages from mortgage issuers, repackaging them and then selling off to investors. This means that investment bankers were tricking investors into purchasing the actual branching off debt of those mortgages, thus creating more debt for our economy, but putting more money in the investment banker’s pockets. As time went on, there were less and less new mortgages to securitize so the structured products groups at banks started repacking MBS’s, which created an uttered downfall to our economic destruction.
Counter claim, however, some Americans believe that banks should be regulated and watched carefully, so an economic crisis will never happen again. From the journal of financial services, Author George J. Benson says “I delineate nine reasons that could justify continued regulation, particularly in the United States. These include deposit insurance, preventing banks from obtaining excessive economic power, reducing the cost of individual bank insolvency, avoiding the effects of bank failures on the economy, protecting the payments system, serving the interests of popularly elected officials, enhancing the Federal Reserve’s control over the money supply, suppressing competition, and protecting consumers.” Benson giving these reasons is important, because he is more cautious than an investment banker would, so it gives the viewpoint of another concerned fellow American’s, but he is coming from someone with no financial experience, only coming from what he feels and what he fears for our future. Allan H. Meltzer, professor of political economy at Carnegie Mellon University’s Tepper School of Business speaks about the regulation of banks by saying “The problem here is not a bank failure, as much as it is a failure of the payment system — that no one will accept payments from another bank because they don’t know if they will be able to honor them. That is what we want to prevent.” The professor has a point in this, in which he is suggesting that the problem isn’t that the banks are failing, it’s the people’s faith and trust in the banks is the primary issue. If you can no longer have customers to give you their endorsement, then how could your bank possibly succeed? It is like every business and a bank works the same way and is no exception to the free market rules. It works in the way that if you do not have customers for your business or any revenue, it will fail.
The Glass-Steagall Act is a perfect example of regulation in banks in the United States. The act was passed by the U.S. Congress in 1933, otherwise known as the banking act, which prohibited commercial banks from taking any action in the investment banking business. The act was sponsored by Senator Carter Glass, which was the secretary of treasury before he became a senator, and Rep. Henry Steagall, a member of the House of Representatives at the time following the great depression. The act was passed as an emergency standard to match the failure of thousands of banks during the Great Depression. It lost its authoritative affect decades later and was repealed in 1999. Now, keeping it current, presidential candidate and now president of the U.S. Donald Trump called for a potential reinstatement of this during the 2016 presidential campaign. Trump hinted at a potential reinstatement of the Glass-Steagall Act while he was running. When trump became president, Gary Cohn (head of the national economic council), vouched to restore the act to break up the big banks, which is the main point of this old act. The act is meant to break up large and powerful banks, by marginalizing them and splitting them up into different divisions. Making banks weaker creates a non-monopoly on our economy. Cohn made a persuasive case for this act, while senators supported the idea, such as John McCain(Arizona) and Elizabeth Warren(Massachusetts). The majority of those in favor of this act being reinstalled was republicans, but a small percentage of democrats were in favor of it, such as Bob Casey(Pennsylvania). The bill would instill a division of banking from investment bankers and insurance bonds being watched over directly from government officials within a five-year transition period. If everything goes the way it’s supposed to, it would make the banks more secure for depositors and begin to diminish the risk of another depression or 08 crises come our way. CNN had a response to his statement days after, by saying “Returning that Great Depression-era law would force the mega banks to break themselves apart by separating their Wall Street investment bank divisions from their Main Street checking account business.” CNN is giving a nod to trump, approving the idea of conducting a bill of a 21st century version of this act. If that is trump’s intent to bring back this act and revise to our own economy, could potentially create balance in our economy. The act isn’t perfect in any way and still has holes in it. Deal Book, a business and policy website states that Cohn has a hidden interest for his old partners Goldman Sachs. “Unlike JPMorgan Chase and Bank of America, Goldman Sachs has no physical retail bank branches and only a sliver of its rivals’ trillions of dollars in deposits.” Creating this act does not put regulation on everything, just what many of the banks relies on, which may seem fair, but with every act and every law, someone always benefits from it. No matter how much regulation you put on anything, you will always find people that luck out and only benefit from economic regulation. The article continues to go on and say, “What better way for Mr. Cohn to repay his former colleagues than by endorsing a plan that would virtually eliminate Goldman’s remaining competitors and cause them to spend years, and billions of dollars, going down the rabbit hole of separating their commercial and investment banking businesses?” Even though this quote is purely hypothetical, it does make you think of what exactly this act will do for America if it were to be passed. The act would not be the same as the one from the great depression, but it would create opportunities for regulation to occur within the banks and insurance companies. But remember, people in Washington always have an agenda or something that may not only benefit America but benefit them financially as well. Officials could also say that they will make the law the exact same but a little more revised in comparison to the old one. You also must think about the chance of no revisions being done that may benefit us, and may only benefit banks, causing leeway for another economic depression or breakdown.
Now, regulation of banks may not be such a good thing, it could also be a tentative move by the government to get in the way of progress and development of banks. VP of Commercial Banking at California Bank of Trust in Los Angeles (JP McDonald), said “I agree with your thesis Brandon, because overregulation in banks have been a problem since the 08 crises. The reason I agree with you because, as a bank, we have a lot more rules set in our industry now, which decreases our potential as a business.” After interviewing him, he had a biased view on it because he works for a bank and his department is one of the few areas they are trying to regulate more often. Regulating areas like commercial banking just because of the risk factor of losing money is both smart, but tedious at the same time. Professionals in areas like commercial banking are not able to work as freely as other employed workers in any bank, thus creating potential error. JP has worked for his bank for ten years, which was the exact time the 08 crises hit. He is still dealing with problems today, that are about the 08 crises. You may be confused of wondering “What is commercial banking”, well JP further explains his role in his company, by telling me “I’m a loan officer and I loan money to our clients and I sign off and I am the final say in how much money as a bank give them.” JP’s role is very important, because he determines how much money companies or startups, to jumpstart, save, or fill a basic need the company needs and is asking for aid. During the interview, JP also mentioned that he is limited by the government for how much he is allowed to give at a time, which seems reasonable, but let’s review a couple of scenarios. Say a business needs over $500,000 dollars to fill their needs to complete a project they are working for and the government only allows his bank to sign off on $350,000, because the amount being asked for, sounds too risky. But, also think about what would happen if they were not able to get the loan they needed. The company may go under and lose money, which is not the way of supporting American businesses around the country. The bank also loses a client, which in the long run loses money and loses future potential business with that client. The company may also reach out to another bank and take JP’s bank’s business. Even though that is the way free market works, it is still not fair that the government steps in the way and prohibits the needs from both the bank and its clients. The free market is an amazing and beautiful thing, but once the government steps in and interferes with progress, then everyone loses. There is such a large trust issue between the banks and the government in our country. Whenever the banks fail, they blame the government and whenever the government fails, they blame the banks. If this relationship between both the banks and our government, then we will have another stock market crash, another recession, and another crisis. No matter how much regulation you put on the banks, you will always find problems within our economy. Both of these powerhouses that run our country have to fix the relationship between each other and finally work together. Both have to understand that in order have running a country and having a great one, requires them to see eye to eye. They could blame each other, talk trash on each other, and even twist their arm a little, but that isn’t going to solve anything at all what so ever. Think of the relationships between the two this way, when Baron de Montesquieu in 1784 created the system of checks and balances between the three different types of government to make sure that all branches kept each other in check and had a system set of rules to go along with it. That idea from this French philosopher during the late 1700’s, is exemplified in the 21st century of America with the banks and government. They keep each other in check to a degree, but the government has a control over the bank, much more than the bank has control over the government. The banks should have more power than it does now and make it a partnership, not a dictatorship.
According to “The economist”, it gives another example of overregulation by saying to “Consider the Dodd-Frank law of 2010. Its aim was noble: to prevent another financial crisis. Its strategy was sensible, too: improve transparency, stop banks from taking excessive risks, prevent abusive financial practices and end “too big to fail” by authorizing regulators to seize any big, tottering financial firm and wind it down.” This law was simple, in other words it was to shut down banks that had too much power overall, or it was to prevent giving banks too much leeway for risk decisions that may lead to collapse of businesses, or even worse, our economy. This law may seem great, but it also may lead to another economic break. The reason for a potential break, is because it would lead to overregulation which is the main problem with these laws, acts, or whatever you want to call them. It would lead to potential collapse of our economy, because banks would not be able to take risk at all, which also moves our economy forward. It would also increase the amount of tension between banks and government. There’s an old saying with a man that owns a dog and attempts to correct it on something. The man smacked the dog too much when it did something wrong, and what did the dog do? The dog bit back. Now, if you sometimes pet the dog and give it a treat once and awhile, you can sometimes “correct” the dog. That’s what’s happening with banks and its overregulation from the government. Its ok to put regulation on banks, but once you start putting them down with more rules and regulation, you are soon going to be seeing a rebellion with the banks in their relationship towards the government. You have to sometimes give your “dog” leeway and able to make mistakes. No big deal if you smack the dog once and awhile, but you also must praise it when it does a great job. But that’s not the case with the relationship between banks and the government. The bank will never learn from its mistakes if the government keeps punishing them with never a reward. It does not help our economy by passing these laws by making drastic changes to banking. There may be a point where our banks will be so marginalized by our economy, to where we may not have banks at all.
The more of regulations and rules from our government being instilled on our banks, the more chaos will reign over our country. This essay has included many examples of overregulation and it’s affects, such as the Glass-Steagall and the Dodd-Frank Law. Even though the Glass-Steagall act came in around the great depression, it was the stepping stone for regulation of banks in the United Sates. The only problem with this law previously stated in the essay, was that it does not go with our modern times, which the overregulation of banks is unnecessary, which resulted in years of fear and questions in our economic system. The Dodd-Frank Law that was established in 2010 however, was in response to the 08 crises. This law seems perfect to the naked eye, but really others in the government, or other partners with the government may benefit from some of the laws being passed, while other business and industry are destroyed. Through someone that has experience in the banking world, JP McDonald, the commercial banker that was interviewed, gave his opinion on whether banks really are being overregulated from the government. His thoughts concurred with the thesis of this essay, which is banks being overregulated by the government and holding back the potential of it’s great future ahead of it. All sources are more than valid that were in this essay, and without a doubt make a case to look deeper into regulation of banks all over our country. The evidence is clear, overregulation is happening in our banks and soon, if we do not act, their may be no economy left.

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