by Peter Reagan, Birch Gold Group:
Most Americans don’t spend their evenings reading bank regulation testimony.
I don’t blame them. Between work, family, bills and everything else life throws at us, very few people have the time or patience to track the fine print of financial regulation.
The trouble is, those boring rules can become very important very quickly – especially when risk builds quietly inside the banking system.
Some of us are wired to notice these obscure policy stories. Most people quite reasonably are not.
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It’s division of labor in the economy. They might learn information that they can use from me, while I can appreciate that they can replace my car’s transmission, which I have no business even trying to do.
So, going back to people’s (lack of) interest in economics and monetary theory… I do have a great interest in these topics, so a recent news story got my attention… and gave me flashbacks to nearly twenty years ago.
Testifying before Congress
What is going on is that the “regulatory chiefs” of the FDIC (Federal Deposit Insurance Corporation), the Office of the Comptroller of the Currency, and of the Federal Reserve are scheduled to testify before Congress about regulations (no surprise, I know).
Specifically, according to Reuters, they’ll be making the case for reducing regulations on banks.
Their reasoning? To create an environment for economic growth, and there is a certain logic to that. After all, reduced regulations in some areas could mean that loans would be more easily granted, and this could help people who otherwise might not be able to get access to that capital to actually start or expand their businesses.
And the flip side of deregulation is historically also true: increased regulation often has a dampening effect on both the economy and on innovation in sectors that are highly regulated.
The Bank Policy Institute essentially implied that in an article in which they stated that regulations on banks, even when put into place to help consumers, can have the effect of making loans harder to get.
And ask anyone in business: loans, for many businesses, are what they have to look at in order to start or expand their business. So, if loans are harder to get, then the number of new businesses decreases as does the number of growing businesses.
The statement wasn’t made so clearly, but I suspect that this is another step encouraged by the Trump administration to get the economy growing at a more rapid pace. And to be fair, that is a goal most Americans can support. The harder question is whether faster growth built on looser financial rules also means more hidden risk.
Frankly, most Americans want the economy to thrive no matter who controls Washington. I certainly do. The question is not whether growth is good. The question is what kind of risk we accept in the name of growth.
Balancing risks and rewards
The concern is not imaginary. Many analysts have argued that weak oversight, excessive leverage, poor lending standards and badly designed incentives all helped set the stage for the 2007–2008 financial crisis. Deregulation was part of that broader debate – but the deeper issue was risk that had been allowed to build out of sight.
The “Great Recession,” we call it, or sometimes just the Global Financial Crisis.
