It appears that the banking industry has pushed the American public, and in turn President Obama, just a little too far. While the Obama administration’s attention has recently been concentrated upon healthcare, it suddenly seems to have done an abrupt about-face to refocus its efforts upon banks and the American banking corporate culture.
This new “war” upon the banking industry, as President Obama terms it, begs the question: will new government regulations solve the problems of risky investment strategies, the bonus culture, and lack of consequences that have so frustrated the American public? And furthermore, how exactly might President Obama’s new restrictions affect the banking industry?
Two possible scenarios might result from Obama’s efforts. The first is that the banks receive this smack in the face as the eye-opening invitation to change that Obama intends it to be. The second, and in my opinion much more likely scenario, is that the banking industry will find new and creative ways to subvert or combat these regulations in an effort to sustain their profitability.
Let’s look at both.
Getting Back to Basics
It would seem that President Obama, influenced by populist opinion, is hoping that his threats (which are all they really have been to this point) will force the banking industry back to the core basics of serving its customers. Taxing banks, ending proprietary trading, and limiting banks’ abilities to invest in hedge funds, if they come to fruition, could do just that. However, there is more to the effects of these possibilities than first meets the eye.
While the public might initially applaud these efforts by the president and his administration, the regulations and their effects could eventually come to be looked upon as a wolf in sheep’s clothing. Initially, there will be hopes that banks will suddenly see the error of their ways and open up credit to consumers and small businesses, reduce the number and severity of their fees, stop their risky investment practices, and even begin giving away free toasters again when customers open a new savings account.
There is certainly a possibility of such a sudden re-connect between Joe Public and the banking industry, especially by some smaller banks or if larger banks are broken up and competition increases, but by no means should we expect it. Are we going to see the credit floodgates re-open, lending resume as usual, and the bank down the street become a good friend again as opposed to a hated enemy who rakes in ungodly fees for every service it provides, anytime soon? I highly doubt it.
In all likelihood though, if banks are curbed from their trading and investment habits, we could see them hunker down even more when it comes to lending, stashing cash for their own security rather than that of their customers. New taxes and trading restrictions could also lead to huge declines in power and profitability of banks, which could lead to more failures, thereby harming Wall Street and the US economic recovery as a whole.
Finding New Ways to Continue ‘Business As Usual’
Unfortunately, and rather predictably, it would appear that new such government rules and restrictions might only lead to a drawn out continuation of the banking industry’s “business as usual” as President Obama terms it.
Sure, taxing banks might help put a little of the TARP fund money back into the government’s coffers, but it probably won’t be a substantial enough sum, at least initially, to make a significant contribution to the overall sum that total taxpayers spent to keep the American economy afloat in the first place. Moreover, the limits on the banks’ abilities to trade and invest will likely reduce profitability, not to mention stability of a freshly recovered sector. This could mean putting the breaks on the progress the stock market has made during 2009. It could also force banks to look for new and even more inventive ways of pulling money from their customers, which would involve finding creative loopholes and/or investments strategies to turn a profit at the risk of their customers’ money.
In addition, if it’s a battle of wits and wills between the banking industry and the US government we’ll be watching, I’m putting my money on the banks. They have better talent, they are quicker, more motivated, and more willing to take risks and innovate faster than the US government. I certainly hope the Obama administration understands with whom they are dealing. Powerhouses like Citibank, Goldman Sachs, JP Morgan and others aren’t going to like giving up their current way of life.
The banks will likely fight these new policies tooth and nail, either drawing out the process for so long that the government eventually turns their attention elsewhere – such as social security or immigration – or spending so much money on lobbying and lawyers that they will continue to risk their customers nest eggs to recoup their loses. I’m guessing that by the time President Obama’s watered down version of what he’s planning right now makes it though congress, it will be easy enough for the minds of Wall Street to find a few loopholes to get them back in the game.
In many cases banking executives are much more intimately acquainted with the intricacies of investment strategies in a globalized economy and the myriad loopholes that exist than any Washington politician or former Fed Chairmen. These banks have the best and brightest talent at their disposal (although at times it’s hard to believe), and they are often willing to do whatever it takes to succeed and be profitable. This greed desire for wealth and success can go a long way to finding ways to be profitable, especially when investing other peoples’ money.
Therefore, while President Obama’s heart might be in the right place, he may only be delaying the inevitable return to business as usual for big banks. After being bailed out by the same government that is now scolding it a year later, the banking sector may be left feeling like a child who isn’t sure whether daddy is going to hug it or hit it. It may therefore decide to continue playing by its own rules instead of attempting to figure out what ‘daddy’ will do next.
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 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
