While the left claims the greedy 1% led us to financial ruin, years of reflection indicate that wrongheaded regulation and policy had much to do with magnifying the depth of the recession. Deregulation was not the problem, wrong regulation was the problem and Dodd Frank has not fixed it.
Regulations are not better if they are longer. Most likely the opposite is true. Simple regulations strongly enforced will serve us better.
Letting banks opt out of regulations by holding higher capital ratios is a great way to bring competition to the bloated salaries on Wall Street while protecting the taxpayer.
From the editors of The Wall Street Journal, Fixing American Finance
Don’t believe the shrieks that this is about “rolling back” financial reform to let the banks run wild. The financial system was heavily regulated before the 2008 panic; regulators failed to do their job (see Citigroup) and missed signals from the housing market, among other mistakes. The Dodd-Frank Act of 2010 doubled down on the same approach: Give even more power to regulators with the promise they’ll be smarter the next time.
History tells us that is a fantasy. Regulators will focus on solving the previous problem, while they miss where the excesses are really building. As Charles Kindleberger taught, the essence of a credit mania is that everyone follows everyone else and thinks it will never end. Regulators are no better than bankers. As late as March 2008, then New York Fed President Tim Geithner was telling his colleagues on the Open Market Committee that banks were in good shape.
Mr. Hensarling has a better idea, which is to let banks build much higher equity-capital cushions to protect against the next mania and panic. Now, as before the crisis, regulators pretend that giant banks have abundant resources to absorb losses by allowing them to report a bogus “Tier 1 risk-based capital ratio.”
With a complicated process subject to intense lobbying, regulators undercount exposures they deem to be safe—the way they designated mortgage-backed securities rock-solid before the last panic. This allows well-connected bankers to convince Washington that their favorite assets should have low “risk weights.” Regulators can politically allocate credit by favoring some types of lending over others.
The Texas Congressman wants a simpler system in which private investors with money at risk decide which assets are safe. Under the Hensarling plan, banks can opt out of today’s complicated rules if they have capital equal to 10% of their assets. Their tally of assets has to include off-balance-sheet exposures. No more hiding toxic paper in conduits or structured-investment vehicles as Mr. Geithner allowed Citi to do before the financial crisis. And no more pretending that a financial instrument has no risk because a regulator says so.
Capital at the largest banks today often runs below 7% of assets. The Wall Street giants would have to raise a lot more equity—and therefore pose less danger to the public—to get regulatory relief. They thus may not like the Hensarling plan, which is fine. Smaller competitors willing to operate without a taxpayer safety net deserve the advantage of lower regulatory costs.
The promise of the Hensarling plan is more safety for taxpayers and a banking system that supports a growing economy. One reason Dodd-Frank has never delivered the economic boost that PresidentObama promised in 2010 is that Washington’s distorting role in the flow of credit was dramatically increased.
In this era of hyper-regulation, David Malpass of Encima Global notes that banks have been making relatively few loans to small and mid-size companies while extending huge credit to large corporations and government. A slow-growth economy that doesn’t efficiently allocate credit isn’t safe for anyone.