By Donald Hank
In a recent video featuring former finance regulator Bill Black exposing fraud and corruption in major financial institutions, the GOP is seen as sticking to a highly questionable philosophy of non-regulation of finance even in situations where non-regulation leads, directly or indirectly, to implementation of taxpayer-paid bailouts and guarantees for bad banker decisions:
This video shows that the old Republican habit of defending a regulation-free banking system could soon be an albatross.
The Old Republican theory is that too many regulations on banks will hamstring the free market. In theory, this libertarian approach to finance makes sense. But only in a vacuum or a libertarian (laissez-faire) utopia does it hold true. In the real world, the government is obliged to guarantee deposits of bank customers against bank failure. But when you relax regulations to the point that banks are no longer responsible for their actions, and the public is obliged to pick up the tab, you get the kind of situation that led to Reagan’s savings and loan scandals. This scandal shows you can’t treat banks as independent businesses subject only to the laws of supply and demand as long as the government guarantees deposits and loans made in these banks. This kind of practice costs the taxpayer a lot of cash, which, in a free market, they would not have to pay. If you want to apply totally libertarian (or free market) solutions, you would also have to deny bank customers all taxpayer subsidized guarantees. This is not going to happen, so some regulations are necessary to protect the taxpayer against either poor judgment errors or criminal behavior of the kind discussed by Mr. Black.
The government used to just guarantee deposits up to a certain amount to protect the bank customer against failure – a practice that in itself led indirectly to some warps. But now we have additionally introduced the reckless concept of government guarantees for loans – in the form of bailouts for banks with lax lending practices but also in the form of coercion of the CRA variety.
That is an untenable situation for the taxpayer, who now is often held at gunpoint every time a bank fails for abusing this protection.
It is arguably more favorable to a free market if the bank is either made 100% responsible for its actions – ie, no bailouts – or the bank is 100% regulated so that bad loans cannot be made. It is also essential to the operation of the free market to prosecute to the fullest extent of the law and breach of bank rules that make banks dependent on public funding in the form of bailouts or the like.
Neither situation will ever develop in the real world, so a balance between regulations for banks and taxpayer-paid guarantees for bank customers must be found.
The blind policy of simply refusing to regulate (to meet GOP demands) while continuing to provide taxpayer-subsidized guarantees for loans and deposits (to meet essentially Democrat demands) will lead to an untenable situation, especially for the GOP. If the GOP is eventually seen as blindly deregulating in ways that directly or indirectly trigger taxpayer subsidies for banks, the GOP will fail to hold onto its lead among voters. Only a few rich bankers could desire such a situation.
The only sensible move is for the GOP to start being more flexible with regard to regulations, specifically where deregulation would entail a risk of public monies being used for bailouts, guarantees on deposits and the like.
Deregulation is a free-market solution only if the government is not paying the bill for bad banking policies and decisions.
It is time for the GOP to realize that taxpayer subsidies to the rich can put them right back behind the eight ball again. The Tea Party must take up this issue.