Of Majorities and Modesty

Perhaps with some weeks enough dust has settled to allow a few reactions to the recent American elections, with more perspective than can be gathered from listening to reporters interviewing reporters. I will offer views that focus mostly on the results of the congressional elections, drawing upon experience from more than two decades of work in the Senate.

I do not, however, wish to minimize the importance of the elections for governors and state legislatures. In fact, I suspect that the next President of the United States will more than likely be a current or former governor than a Washington politico. Most Presidents, historically, have come from the state governments, which I find encouraging for our federal system. Moreover, judging from what we have seen, former Senators do not seem to make very good Presidents. I cannot name one to whom we can look with admiration for what he accomplished in the White House. There seems to be too much Washington blindness in them to govern effectively for our whole nation.

I am straying to an election yet to come, though. Back to this year’s results, I will begin with the view that we should expect, with the media-scorned Republicans holding the majority in both House and Senate, that the finger of blame for all problems—real or imagined—will be pointed at “Congress.” Disputes between legislative and executive branches will tend to be cast as exposing the nation to great danger as a result of congressional intransigence and/or “politics,” as if no real issues of policy—no questions of life, freedom, or wealth—are involved.

It is happening already. In one bizarre report I heard this week on a major network “news” report, some Amtrak railroad drawbridge in the northeast is over a hundred years old and prone to getting stuck when it opens to let ships pass. Amtrak wants a billion dollars or so to fix it, but, as the “news” story would have it, Republicans in the new Congress “are not looking for ways to spend money.” That was the story. Note the nothing new here. The bridge has been around for a hundred years and did not suddenly become prone to malfunction this November. But the election has now made it a story; a problem is arising, not because the President or the Democrats in Congress for several years did not seek to fix it, but because the new Republican majorities are not interested in spending money. The bridge is not the problem in the story, the Republicans are. Expect more of this kind of media “news.”

Second observation: in recent decades Congress has increasingly surrendered more and more authority to the executive branch, including to the regulatory agencies. The Senate, under the misleadership of Majority Leader Harry Read, has given up even more power and authority (perhaps in another post I will expound on lessons from the Senate of Rome, which by avoiding decisions paved the way for the Caesars—who were all too ready to make decisions). The Democrats retain full control of the executive branch. No small thing. In the remaining two years of the Obama Administration look for more aggressive activity from the White House and the regulators as they test just what they can try by regulation and regulatory fiat, without any detours to Capitol Hill. To quote Jacob Marley’s ghost, “Much!”

When it comes to big Republican plans to make major changes, the quidnuncs will be fed explanations of the thinness of the Republican majorities, along with the “responsibility” of Republicans to share power with Democrats that the Democrats failed to win at the ballot box. When it comes to work that needs to be done, the repeated common wisdom will be that the Republicans have the majority, so nothing should stop them from getting on with the job. There will be little mention that the President can veto what Congress passes, and that Democrats in the Senate will likely filibuster anything that the White House threatens to veto, saving the President the trouble—and political risk.

Yet, there are things that the Republicans, even with working but not overwhelming majorities in Congress, will be able to do. Most important, they get to set the agenda. They get to decide what issues will be debated, what hearings will be held, what will be put to a vote, even when they may not have the votes to break Democrat opposition in the Senate. It will be some relief that instead of the familiar series of proposals to curb liberties, raise taxes, or stifle economic growth and opportunity, the agenda will tend toward ideas of freedom and prosperity, though actual accomplishments will of necessity be modest against the strong opposition of the President and his media allies. I will take modest improvements over the calamitous policy fails of the past several years.

Of Banks and Over Taxed Regulators

Banks, who needs them? A quick question and a quick answer: a thriving, prospering banking system is essential for a thriving, prospering modern economy. Banks bring together the resources of savers and the needs of borrowers, particularly borrowers who seek funds to establish or expand businesses or families and individuals who use occasional borrowing to smooth out their income (good banking principles penalize people who would borrow in order to live beyond their means, but more on that at another time).

Banks also created and maintain the payments system, the means by which money is transferred quickly and accurately throughout the nation and even internationally. Bank services include as well a variety of wealth management tools by which individuals, families, businesses, and governments can store, grow, and make best use of their financial wealth.

Without banks, almost none of these services would be available. Many non-banks provide bank-like services, but they all come to find the need to rest their own services at some point on a bank.

Banking in the United States has grown with the nation, from very simple institutions in the eighteenth and early nineteenth centuries, to a wide variety of bank types, charters, and business models, as diverse as the financial demands of the customers of the largest and most diverse economy in the world. I once presented at a meeting in Chicago a list of about two-dozen different types of banks in the United States. We have national banks, state chartered banks, small community banks, larger regional banks, and very large banks with extensive national and international business products and services. All of these operate and compete together, with a body of customers behind each one who think that their bank offers the best available choice of services that they want. No other nation in the world has a banking industry like ours.

The recent recession and financial panic—and the inevitable politicizing of finance that came in its wake—have thrown much into confusion and imposed upon sound and prudent bank supervision harmful ideas born of reckless sloganeering and hubristic financial engineering. The complexity of banking—no more complex than information technology, communications systems, or modern manufacturing—has been superseded by even more complex bank regulation.

The rules governing banking are too much and too many to function reasonably. They have become more than the very human people in the multitude of bank regulatory agencies can manage. The disciplining role of markets and the valuable service of banker judgment have in large measure been replaced by bureaucratic procedures and the judgments of government officials. These officials have had little if any practical experience making loans, taking deposits and putting them to work, building financial wealth, or otherwise providing products to customers. Government officials cannot run businesses. Now, their government jobs have become so demanding and complex, that they will not be able to do their own jobs, either. Too much has been placed upon them.

Those most harmed by all of this are bank customers. For the moment, bank profits are up, but that is because their losses are down as they recover from the recession, not because services to customers are expanding. As a result of government interest rate policies, depositors earn almost nothing on the money that they place in banks. The expanding oversight involvement of bank regulators makes it dangerous for banks to offer new services to customers; the risk of breaking any of thousands of pages of regulations has become too great. It takes almost half an hour to open a new bank account, something that used to take minutes. Fewer credit-worthy borrowers today qualify for mortgages than just a year ago, before new regulations went into effect. The number of banks has been declining in recent years, dropping at the rate of nearly one for every business day, week in and week out. Only one new bank has been opened since 2010. We have fewer banks today than the nation had in 1893. A stagnant industry is less able to evolve to meet changing customer needs and preferences.

For the good of all of us who rely upon banking services, and for the sanity of financial regulators, we need to return to the principles of good banking. We need to restore a system of supervision that is measured, not by how much banker judgment it takes over, but by how it adds value to the ability of banks to serve customers. Government agencies—and the laws that they administer—that are derived from a founding document that begins with the words, “We the People,” should do nothing less, and nothing more.

On another day I would like to share some thoughts about how banks are being goaded to become their own enemies.