I originally released this article a couple years ago - some bank mistake, magnified by it being a national bank had occurred. Bank deregulation amplified these mistakes making these national mega banks not insurable by the FDIC (even though they do - and tell us they do - it makes us feel better (?)). Through deregulation, bank mistakes are magnified and local money becomes a foreign investment. There is a very simple financial principle that makes this very understandable - portfolio theory; if one local bank goes out of business, the FDIC can cover it; when a mega bank goes out of business, not only do we the people lose, but we the people feel it. Mistakes happen (i was a proponent of the deregulation of banks); it about time this one gets fixed. Like Politics, all money is local.
Now the original article (with a few small modifications).
Until the 1970s, banking was governed primarily by state laws, and banks could do business only in their home states. From the mid-70s through 1999, a series of laws deregulated banking eliminating state lines until banking became completely deregulated; those laws and acts included:
- Marquette Decision (1978)
- The Depository Institutions Deregulation and Monetary Control Act of 1980 (DIDMCA)
- Alternative Mortgage Transactions Parity Act of 1982 (AMTPA)
- The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA)
- The Gramm-Leach-Bliley Act (GLBA), also referred to as the Financial Services Modernization Act of 1999
So why did deregulation occur? Technology, competitive opportunity and expansion, a spreading of the capital to where it was needed, and finally, an economy of scale - a more efficient system. All of these reasons make sense - most occurred and some did not ("...banks peak in efficiency when they reach the size of a small regional institution". says Stacy Mitchell of The Institute of Self Reliance - watch her TED presentation).
So why was deregulation bad? Very simply, money no longer had to stay close to home. Banks could invest your money in projects and products anywhere. Since the idea of business is "to profit", money went to where the most profits could be obtained (the money business is much different than services or manufacturing where location in significant). Sometimes the money went to bad mortgage instruments - the rules allowed this. Sure there were problems like the ones the media made big, but things like big bonuses were earned by creative smart people working within the rules - oh yeah... Having banks working within state boundaries would have greatly limited the size of those bonuses as well - simply, the market would not have been as large.
So what is the solution here? Keep money local - local mortgages, local business, local commerce, local people. In my opinion, moving banks back to being state regulated would solve the problem. This is a monumental task that some people would scream out to be impossible to accomplish. It's not. It was done with ATT (modern history) and Standard Oil (early in the 20th century); in both cases, the sum of the parts were greater then the whole as competition and creativity boomed. So, how? It will be a process much like, but much easier (IMHO) than the aforementioned examples. Regretfully, only the people would share this interests - the banks, their lobbyists, and most importantly, the money would have no interest in this. I would be perceived by the money (and thus the media) as a flaming liberal - whatever.
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