Banks Should Be In The Business Of Banking

By Lon S. Cohen

And the government should be in the business of governing. Seems like a simple concept, no? Recently, the blending of government and banking has become troublesome. While the government was right on TARP and other emergency actions since 2008, when banks started falling like dominoes, it hasn’t budged an inch on much needed regulatory reform. The banks have regained strength, become more powerful and profitable than ever, yet here is Congress still dilly-dallying over the details. Before long it will be two full years since Lehman Brothers failed and yet, we’re still going to be no closer to figuring out how the government should regulate banks. Putting the old partisan politics aside seems prudent before the next crisis is upon our heads. It benefits both parties to stop haggling and fighting in public and make something functionally beneficial for America again.

Deregulation and soft policies toward banking (and the shadow banking institutions) resulted in an economic disaster unseen in generations. Can we be the generation to rise up to the challenge and that shepherd financial reform through legislation to make a more sensible, better functioning and modernized economy? It’s clear that less regulation is not the answer. It’s also clear that modern markets are no better at self-correcting than any in the past. In fact it’s the decoupling of regulation that worked since the Great Depression era from the so-called modern banking system that seems to have wrecked our economy.

Hubris played a big part. Our times have changed, they hailed. The markets are smarter now than they have ever been. Speed, technology, innovation and a massive user base make for the sturdiest financial system in history. That crock of bull went out the window around the time Mr. McCain made the statement that the fundamentals of the economy are still strong. It seems that speed, technology, innovation and the user base are what caused the economy to tank, along with some shady, unregulated practices going on all the way through the supply chain from the half blind ratings agencies to the zero percent down, no income, no asset check home buyer who should never have been home shopping except for the buzz about how everyone should, could and would own their own home.

We need regulation reform. We need to get the banks back into the business of banking. Some banks seem to think they are only in the business of making money for their top executives. Bonus pay is a big issue right now, but it’s a distraction because when bonus pay is a long forgotten blip in our collective cultural history, we’ll have a dysfunctional banking system. The banks should serve the needs of the community while making a profit. Banks have had it backwards screwing depositors, small businesses and borrowers while protecting the big bonuses and big profits. Any regulatory reform needs to address this. Products and fees should be tailored to the real needs of the marketplace not to the profitability of the bank.

The government has become a partner in the banking industry. It needs to get out of the banking business. While even critics have to applaud how well most of the banking rescue programs worked and how much less money it will cost the American taxpayers than initially assumed, it’s high time that the government strategize an end game. One of the biggest criticisms encountered in the Iraq War was that there was never a clear exit strategy. Time for the current administration to step up and define one for all the knots it tied itself up into with the banks. We need government regulation. It is a necessary evil. No company likes the government meddling into its affairs. We Americans love our ideal of a free market but anyone with an ounce of historical knowledge can remember that people drive markets and people are imperfect and greedy. The government must help to set controls on the market or else highly complex derivatives explode and shake the foundations of those supposedly self correcting markets. We see how well that worked out. Lehman Brothers failed and it set everything into a tailspin. We needed the government to prop up the economy but only because regulators took their eye off the ball.

Congress needs to hammer out a comprehensive reform bill before the two-year anniversary mark of the Lehman collapse so that we can make the unfortunate words of John McCain true when he said that the fundamentals of the economy are strong.

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