Wednesday, February 17, 2010

Study written by banks says bank regulation will hurt the economy

This is cute. A New York Times headline ominously reads, "Analysts Put Bank Reform Costs at $221 Billion." If you stop at the headline, that sounds pretty scary, and a good reason not to regulate banks. But reading the article itself, you quickly find out that the inmates are writing the report on the asylum:

If all the initiatives from regulators are implemented it would cut the average return on equity to 5.4 percent from 13.3 percent next year, hurt economic growth and raise costs for bank services, JPMorgan analysts warned.

“The cumulative impact of all the proposed regulation suggests that there is a real risk that we may move from a system that was under regulated to one that is over regulated and that that could cause a significant increase in lending costs and a negative impact on the economy,” Nick O’Donohue, head of research at JPMorgan, said in a research note.

Yes, JPMorgan is writing the report that says it should not be regulated. Can we go ahead and dismiss in advance any argument against bank reform that cites the $221 billion cost figure?

Especially since the New York Times also reports that more level-headed figures on Wall Street actually support bank reform, because they recognize that bank profits are less important than the public good:

Elders of Wall St. Favor More Regulation

Put aside for a moment the political pressure to regulate banking and trading. Ask the elder statesmen of these industries — giants like George Soros, Nicholas F. Brady, John S. Reed, William H. Donaldson and John C. Bogle — where they stand on regulation, and they will bowl you over.

They certainly don’t think of themselves as angry Main Streeters. They grew quite wealthy in finance, typically making their fortunes in the ’70s and ’80s when banks and securities firms were considerably more regulated. And now, parting company with the current chieftains, they want more rules, Louis Uchitelle writes in The New York Times.

While the younger generation, very visibly led by Lloyd C. Blankfein, chief executive of Goldman Sachs, lobbies Congress against such regulation, their spiritual elders support the reform proposed by Paul A. Volcker and, surprisingly, even more restrictions. “I am a believer that the system has gone badly awry and needs massive reform,” said Mr. Bogle, the 80-year-old founder and for many years chief executive of the Vanguard Group, the huge mutual fund company.

Mr. Volcker, 82, signed up the support of nearly a dozen peers whose average age is north of 70 and whose pedigrees on Wall Street and in banking are impeccable. But while Mr. Volcker focuses on a rule that would henceforth prohibit a bank that takes deposits from also buying and selling securities for its own account — risking losses in the process — most of his prominent supporters see that as a starting point in a broader return to regulation. And most do not hesitate to speak up in interviews with The New York Times.

Listen to Nicholas Brady, a Treasury secretary in the late 1980s and early 1990s and before that chairman of Dillon Read & Company, now extinct, but in its day a prestigious Wall Street house. “If you are a commercial bank,” he said, “and you wish the government to guarantee your deposits and bail you out if necessary, then you can’t be involved in speculative activity.”

Current bank bosses cite scary cost figures to justify "heads I win, tails you lose" policies. They want to be allowed to profit from extraordinary risks, and then be bailed out when those risks blow up, because that's the best way for them to maximize profits for their shareholders. But it's important to remember that those cost figures fall on the banks' balance sheets, not America's. And just because the banks and their shareholders lose doesn't mean that the economy as a whole does.


Banks don't work in free markets either: bank regulation and the role of government


  1. Wonderful article, thanks for putting this together! "This is obviously one great post. Thanks for the valuable information and insights you have so provided here. Keep it up!"

  2. I love it: “banks say bank regulation will hurt economy”. Well, they would, wouldn’t they?

    They’ve been saying that for hundreds of years and politicians are fooled every time.
    It is true that tighter bank regulation means less bank lending and thus less economic activity OTHER THINGS BEING EQUAL. But there is an alternative to loan financed economic activity: equity financed economic activity. That is, the government / central bank machine can easily pump more central bank money (monetary base) into the economy. And the result is that everyone has more money and thus needs to borrow less.

    The assets of UK banks have increased a whapping TENFOLD relative to GDP in the last 30 years. To what benefit? All they’ve given is clever clever cr*p like credit crunches, CDOs and so on.

    “Of all the many ways of organising banking, the worst is the one we have today” – Mervyn King, governor of the Bank of England.