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- Paul Constant is a writer at Civic Ventures, a cofounder of the Seattle Review of Books, and a frequent cohost of the “Pitchfork Economics” podcast with Nick Hanauer and David Goldstein.
- In this week’s episode of Pitchfork Economics, Hanauer and guest cohost Jessyn Farrell spoke with Anat Admati, a finance professor at Stanford’s Graduate School of Business, on how banking is regulated in the US.
- Admati says it’s natural for elected leaders to create more safety nets to make banking safe for American consumers.
- The concept of government ‘deregulation’ won’t result in less regulations, Admati explains, but instead will allow banks to create their own regulations that can be prone to negligence and fraud.
- Visit Business Insider’s homepage for more stories.
It’s quite possible that the greatest trick that trickle-downers ever pulled was framing the battle over government’s relationship to business as regulation versus deregulation. It sounds simple, a binary choice between all or none: Either you want businesses to be regulated, or you want to deregulate the market. “Deregulation” in this context sounds sleek, minimalist, and freeing, while “regulation” sounds cumbersome and complicated.
But here’s the dirty little secret about deregulation: It doesn’t really exist.
There’s no such thing as “fewer regulations,” only a shell game that shifts ownership of regulations from one authority to another. What we call “deregulation” simply stands for a belief that corporations should act only in ways that suit their preferences – with no consideration for anything beyond shareholder value.
In other words, human activity within a society is always regulated – the only question is who’s doing the regulating.
All that really changes when, say, the Trump administration moves to roll back regulations on oil drilling in the Alaskan Arctic, is that the government cedes control over drilling regulations, handing the reins to the oil industry. While the government’s regulations sought to protect unspoiled public lands, the oil industry’s “regulations” seek to enrich shareholders and executives at the public’s expense by exploiting irreplaceable environmental resources in exchange for a quick buck.
Back in 2008, we saw what happened when the federal government systematically ceded control of regulations to the banking industry over the span of decades. Left to their own devices, the banks set in motion a mortgage crisis by building up a pyramid scheme that nearly brought down the global economy. The banks’ regulations favored immediate profits over long-term sustainability, and the rest of us paid the price.
That economic collapse is part of the reason why this week's guest on the Pitchfork Economics podcast, Anat Admati, half-jokingly refers to herself as "a recovering finance professor." Admati, who still teaches finance at the Stanford Graduate School of Business, says the egregious failures of unfettered capitalism have caused her to look at banking regulations in a new way.
"I've become very interested in why capitalism and democracy are failing us altogether," Admati told Pitchfork Economics hosts Nick Hanauer and Jessyn Farrell. Admati's fascination with regulatory collapses led her to her role as director of the Corporations and Society Initiative, which seeks "to promote more accountable capitalism and governance," and also inspired her to coauthor a book titled "The Bankers' New Clothes: What's Wrong with Banking and What to Do About It."
Admati realized that the financial industry was ill-equipped to regulate itself in 2013, when Wells Fargo CEO John Stumpf argued against new Federal Reserve regulations that would require the bank to stop making risky, debt-laden bets like those that caused the financial crisis. Stumpf bragged that "because we have this substantial self-funding with consumer deposits we don't have a lot of debt."
Admati was astonished. "In other words," she explained, "he forgot that my deposit is basically his debt to me, and he forgot that it's a liability to him. Why? Because I don't behave like a creditor."
Even though Wells Fargo technically owes its customers the money that they entrust them with, the FDIC insures those deposits and the government has proven that it's ready and eager to protect giant banks from crises of their own creation.
It's only natural that elected leaders create "more and more safety nets to make [banking] safe."
"But the safety net has enabled more recklessness because perversely it created ever more complacency and also removed any market forces from this system," Admati added.
In short, a CEO whose bank was buffered by one comprehensive set of federal regulations that were created to protect consumers from financial negligence was arguing against other industry regulations that would have caused Wells Fargo to behave responsibly. It's a deeply layered ecosystem of regulations - seen and unseen - that often contradict each other in complicated ways.
To a trickle-downer, this might sound like a story highlighting the importance of deregulation. But remember - that's just an argument for letting Wells Fargo create its own regulations, which isn't a terrific idea, given the institution's extensive history of fraud. The best answer is to regulate smarter - to realistically gauge the purpose of each regulation, ascertain how it can benefit the broadest number of people, and enact it so that it functions as efficiently and successfully in the real world as it does in theory.
"We have to have a system in which the government works for us," Admati concluded. "If we don't understand that we need an effective government - not big or small, just competent and effective - to actually create an economy that functions, then that's why we're in the trouble we're in."