“Is this America?”

Posted by Marc Hodak on October 30, 2009 under Irrationality, Politics | 2 Comments to Read

Floyd Norris makes a good case that bankers get paid so much mainly because banks make so much money.  So, he reasonably contends, if you want to reduce banker’s pay you have to reduce bank profits.

Personally, I don’t have much animus about other people’s pay or profits, but I think Norris raises a good question about whether the profits of our larger banks are large for good or bad reasons.  He suggests that the increasing concentration of capital in fewer, larger banks we have seen over the last couple of decades is not necessarily a good trend for the economy, that our economy would benefit from less concentration in the banking industry.  (And bankers would make less!)

Without judging the normative aspects of that claim, it’s worth asking whether all the political brainpower going into reforming our financial services industry will have the net effect of making it more or less competitive.  Will a slew of new regulations, for an industry that is already among the most regulated, reduce or increase barriers to entry?  Will new oversight into the formation of banks encourage or discourage new entrants?

I can answer from personal experience that the trend is not good.  I have a friend who tried to create a new bank.  After getting all the paperwork for state and federal authorities, after raising over $100 million in capital, and after all the other headaches and sacrifices of a start-up that took up 18 months of his life, a single bureaucrat in the FDIC said he would reject his application.  This man would give no reasons for his rejection, which in any case would have been difficult because this very same FDIC bureaucrat promised my friend about a year earlier that if he got all his forms in order that he would certainly be approved.

My friend got his congressman, who is on the finance committee that oversees the FDIC, to ask for an explanation of the rejection.  This congressman forwarded the response he got, which was full of the kind of mealy-mouthed bureaucratese that explained nothing in three pages, including a comment that “there were other reasons besides those spelled out here.”

So, that $100 million has not been allowed to capitalize the nearly $1 billion that could have been lent out to the small businesses that desperately need it.  My friend, instead of contributing his entrepreneurial energies to our economy, is looking for other work now.  And the big banks, despite their own frustrations with the bureaucrats, have one less competitor nipping at their heels.  And their executives are, in fact, doing better for it.

And my friend, who ironically immigrated from France and became a citizen here because he couldn’t stand their stifling bureaucracy asks, “Is this America?”