Elizabeth Warren wants to incarcerate banking executives. She wants to insure former Wall Street executives don’t attain high government positions (recently claiming the scalp of Antonio Weiss). Most of all she wants to prevent the repeal of any part of the Dodd-Frank regulatory monstrosity.
Senator Warren is correctly discerning the public’s economic discontent: survey show large majorities of all parties believe the current economy favors the already-rich over the middle class, and even a majority of Democrats believe the economic policies of the U.S government are rigged against hard working middle class families. Senator Warren’s indignation is meant to pander to this discontent. Unfortunately for those to whom she appeals, the policies she advocates will make things decidedly worse for Main Street and the American middle class.
We live in very peculiar economic times. While the Department of Justice and bank regulators brag about the fines they have extracted from the banking industry for misdeeds during the Great Recession ($180 billion according to Market Watch), the Federal Reserve is coddling the big banks. First the Fed overpaid banks for the government debt it purchased during “Quantitative Easing” to put downward pressure on interest rates; then it began to pay interest to the banks on the huge reserves created through QE–currently $2.5 trillion in idled funds, sitting at the Fed, doing nothing economically productive. Paying interest on these deposits creates a disincentive for banks to loan out this money, and the Fed is preparing to increase the interest it pays, thereby increasing this disincentive.
Using the regulatory tools provided by Dodd-Frank, the Fed and the FDIC are actively dissuading banks from loaning to riskier borrowers – that is, borrowers other than the government and major corporations, also known as the folks who create jobs. Why? Because the Fed has determined that the inevitable increase in interest rates will put imprudent borrowers at risk and they will default on their loans. So we now have 20-something bank examiners telling seasoned bank executives which loans are unacceptably risky. This is government paternalism at its most absurd.
So Senator Warren has gotten what she wants: major banks are emasculated, unable to serve as engines of economic growth, but provided with a guaranteed revenue stream. This is why it is widely recognized by those with eyes to see that regulation principally benefits the regulated. It reduces risk and competition, and guarantees income. Further, Senator Warren is incentivizing government deficit-spending by insuring the interest on that debt remains low.
A better solution to protecting the public from irresponsible bank behavior is to increase capital requirements, so that the owners of the bank (stockholders) are on the hook for any losses, an idea advocated by the eminent monetary economist Allan Meltzer. “Experience shows that regulation is an inadequate substitute for bank capital” Meltzer writes.“Congress should repeal Dodd-Frank and mandate higher capital requirements.”As Meltzer points out, when the London Whale cost JP Morgan Chase $6 billion in trading losses in 2012, there was no call for a bail-out; JP Morgan Chase had pretty of capital cushion.
But here’s the rub: in order for banks to increase their capital, they must be allowed to earn money. Capital flows toward returns on investment. If we are coercing banks under Dodd-Frank to not make riskier and economically productive loans, then they will have be content to live off of the interest on reserves at the Fed, and capital will go elsewhere. Sure enough, the latest quarter saw a significant decline in major bank profits.
Our economy continues to underperform because it remains starved of credit, more because of regulatory factors than economic conditions. Dodd-Frank must be replaced. And a U.S. Senator who is authentically for Main Street and the American worker would be scrutinizing very closely the impact of Federal Reserve policies since the crisis. A good time to do that would have been when Janet Yellen was confirmed as Chairman of the Fed. And what was banking committee member Warren’s participation in that Senate action? She mailed in some questions, and when the vote was held she couldn’t be bothered even to show up.
Steve Wagner is the founder and president of QEV Analytics, a Washington DC -based public opinion research firm.