“Loving Wisely; Not Too Well”
Dolors & Sense
by Sanford Rose
KISSIMMEE, FL—(Weekly Hubris)—4/26/10—America indulges an Othello-like passion for its banks: It loves them not wisely, but too well.
It loves them enough to charge less for a license to collect deposits (FDIC insurance fees) than the value of this license to its recipients. This means that even in normal times, the government subsidizes the gathering of deposits, thereby also encouraging their risky use.
It loves them enough to guarantee, on occasion, the medium-term debt of these banks (FDIC 2008 and 2009).
It loves them enough to countenance their consolidation. The top three banks now control 40 percent of all banking assets, a much higher percentage than just a few years ago. The resulting erosion of competitive vigor has greatly fattened intermediary profits by, inter alia, widening the spread between the “bid” and “asked” prices of most debt securities.
It loves them enough to tell them when the central bank is poised to load up on agency or mortgage securities, thereby enabling the banks to buy low and watch their holdings appreciate.
It loves them enough not to compel them to write down the value of loans that no longer have value.
It loves them enough to print so much money that the banks can borrow short from the public at almost a zero rate and re-deposit these borrowings at the central bank at a higher rate.
Does America love its banks enough to allow them to kill (or re-kill) the economy?
The current view on how to prevent the “fire next time” is to tinker with regulation. In most cases, of course, regulation won’t work. That’s because the regulators tend to be co-opted by their charges.
Regulators may start with a guardian’s view or a simple maternal feeling, but ardency soon grows. The regulated are “us.” It is, after all, where we will seek employment after the regulatory assignment ends.
Little wonder, then, that regulation so often blinks the public interest.
The first and rather obvious step toward remedying this situation is not one easily taken in a country with a free labor market. It is to insist that those who would be bank regulators pledge not to take up employment with a bank or financial institution for some specified number of years after their regulatory tenure ends.
Just one small step (and, of course, many more are needed) on the transformative road to a state of loving wisely . . . but not too well.
Sanford Rose
Sanford Rose, of New Jersey and Florida, served as Associate Editor of Fortune Magazine from 1968 till 1972; Vice President of Chase Manhattan Bank in 1972; Senior Editor of Fortune between 1972 and 1979; and Associate Editor, Financial Editor and Senior Columnist of American Banker newspaper between 1979 and 1991. From 1991 till 2001, Rose worked as a consultant in the banking industry and a professional ghost writer in the field of finance. He has also taught as an adjunct professor of banking at Columbia University and an adjunct instructor of economics at New York University. He states that he left gainful employment in 2001 to concentrate on gain-less investing. (A lifelong photo-phobe, Rose also claims that the head shot accompanying his Weekly Hubris columns is not his own, but belongs, instead, to a skilled woodworker residing in South Carolina.)