Regulation of the Financial Industry

In the midst of the most recent financial crisis, dishonest socialists cry that financial deregulation caused the mess. The public, due to either ignorance or dishonesty or both, echo the same cries. But it should be clear from Chapter 3 that our financial markets have not been free. When government controls both the quantity and price of money — the very basis of the financial markets — there is almost complete government control. Indeed, the Financial Services Modernization Act of 1999 repealed much of the Glass-Stegall Act¹²¹ in 1999, but it did not constitute deregulation, considering our non-gold-backed currency.¹²² Instead, it amounted to corporate welfare for financial institutions, giving them incentives to take on risks for which bank account holders and tax payers would be liable. Other (valid) financial deregulation in recent years resulted in things such as drastically reducing transaction fees (stock trades that used to cost $300 per 100 shares can now be executed for $1.00), among others. In our “deregulated” environment, although the government allows market participants to deal with one another, the guidelines for every action that banks, brokerages, and other financial firms may or may not engage in are dictated by the government (i.e., regulation).

How could the financial markets be called free when they are controlled on a daily basis by the Federal Reserve, the Treasury department, the SEC, the Comptroller of the Currency, the FDIC, the Bank of International Settlements, the Office of Thrift Supervision, the Office of Federal Housing Enterprise Oversight, the Federal Home Loan Board, the Federal Financing Housing Board, the Department of Housing and Urban Development, the states Superintendent of Banking, the National Credit Union Administration, the Federal Financing Bank, the Federal Financial Institutions Examination Council, the Thrift Depositor Protection Oversight Board, and the Community Development Financial Institutions Fund, among others? For more on this, see the housing discussions in Chapter 11.

All of these regulatory institutions are supposedly there to protect investors, bank account holders, and consumers. Instead, they protect the banks and financial institutions and harm everyone else in society. Consider also what D.W. MacKenzie says about regulation protecting the public:

Those who claim that more regulation will stabilize financial markets ignore the obvious fact that corporations lobby those who write regulations. They ignore the less obvious truth that special interests, corporate or otherwise, hold inherent advantages in politics. It is much easier for narrow special interests to organize lobbying efforts. Proponents of increased regulation dream of a world where the state promotes the public interest, but this runs counter to the nature of large activist governments.¹²³

The obvious solution, then, is to get government out of the business of intervening in business.

As for cases like Bernie Madoff’s ponzi scheme, it should be realized that the SEC had been notified by individual investors from 1999 on about his suspicious actions and financial statements. But Madoff used his close family ties with the SEC to keep investigations at bay. The SEC has failed to catch numerous other financial crimes. It has also failed to be in compliance with regulation it must adhere to, and received failing marks from the government’s own auditing arm. But due to its failures, it will now receive larger budgets and more power.

There is one very important thing to understand and remember: without fractional reserve banking, any derivatives and mortgages losses could NOT have affected the entire financial system and put all individual bank account deposits at risk. Any losses incurred by lenders and investors would affect only those parties, not you and me and the entire national and world economy.