An Elegant Solution

The heads of the global banking cartel are currently gathered for their annual meeting in Davos, Switzerland. They have received enormous subsidies and bailouts at the expense of taxpayers in many nations all around the world. Those nations that possess representative governments are now beginning to respond to the outrage of their citizens at this gross injustice. In Britain, this has taken the form of a proposal to tax financial transactions. In the US, President Obama recently proposed regulations to limit the risk-taking activities of banks and to force the "too big to fail" institutions to shrink. The bankers' response is a proposal to take regulatory power away from national governments according to a British Press outlet.

This of course would be precisely the WRONG action. National governments in representative systems are forced to respond to the concerns of their citizens. The bankers' proposal would push the power even further away from the people and vest it in unaccountable supra-national bureaucracies. Our response should be precisely the opposite - devolve regulatory power over the banks back from the Federal government back to the state level. This should be particularly true for commercial banking. First, power should be as close to the citizens as reasonably practical so that the exercise of government power will be as responsive as possible to the average citizen. Second, power should be decentralized so as to reduce the incentive to abuse it and to minimize the damage when such abuse does occur.

One very positive effect would be to create a framework that automatically penalizes large organizations. Giant banks constantly lobbied to reduce the role of the states in banking regulation in the name of "efficiency" starting in the 1970s. One of the chief claims advanced during that period was that US banks would be unable to compete with foreign (especially Japanese) banks without consolidation. That turned out to be correct as the US banks produced a bubble very comparable to the one that has led to a 20 year depression in Japan.

The collapse of the states' role led directly to the creation of corrupt TBTF mega-banks by reducing the cost of geographic consolidation, just as the weakening and then repeal of Glass-Steagall enabled the growth of financial conglomerates via acquisition across business lines. President Obama has called for limiting the ability of banks to take risk and also breaking up the TBTF banks. We agree and call upon the president to immediately re-implement Glass-Steagall in order to confirm the seriousness of his words via corresponding action. In addition, we call upon him to remove all federal roadblocks to state banking regulation.

The mega-banks object to state regulations because it would increase their cost of compliance. We agree that it would increase such costs and further state that such an outcome would be a GOOD thing. It would create an automatic systemic incentive not to expand. It would be far better for the banks to decide to break themselves up rather than to mandate such an outcome. The legal and regulatory environment can provide the proper incentives and then leave the implementation to the individual players when they find such actions to be in their self-interest. The explicit repudiation of the "too big to fail" doctrine should be sufficient as the only reason to create such behemoths was to become large enough to hold the US economy and financial system hostage. But it never hurts to create the right incentives - all that Washington DC needs to do is stop interfering with the states' ability to regulate.

This seems to be an elegant solution.