Occupiers on Bank Law: Fix It

If the Occupy Wall Street protests stand for anything they stand for a popular demand to rein in the banks and to bail out the victims of bank excesses.  Those of us who study banking law for a living have an important role as public intellectuals, to grapple with where the banking rules broke down and how to fix them. We still have a great deal of work to do. 

Dodd-Frank fell short.  It consisted of a series of half-measures and punts to various agencies.  Break up banks that are too big to fail?  Dodd-Frank instructed the FSOC to think about it but not too much, and so far FSOC has followed its mandate.  Limit executive compensation? Instead we got shareholder say on pay.  Separate utility functions of banks from casino gambling?  In lieu of restoring Glass-Steagall, the watered-down Volcker Rule. Require banks to prevent every preventable foreclosure? Hasn't happened. Make them offer transparent and competitive retail credit and savings products?  Still waiting on a CFPB director appointment before we can work on that item.

Banks don’t make anything; they either provide payment and intermediation services, or they engage in various forms of gambling with other people’s money.  The first two functions used to be thought of as low-profit utility services (3-6-3), and were separated by Glass-Steagall and its weaker cousin Section 23A of the Federal Reserve Act  from gambling and speculation. 

Banks make, sell and rent money.  Our fiat currency (decoupled from gold by Republican President Richard Nixon), consists of IOUs from banks, which in turn depend entirely on the faith of people and businesses in those IOUs, and on the willingness of the United States taxpayers to back them up.  In other words, banks trade on government backing; it is their essential product.  The days are long gone when any sensible person would accept a purely private bank note as money.  For this reason, banking is fundamentally different from industries that make things and sell them.  We need to vigorously reassert this principle, and end the charade that regulation of banking is some sort of unwarranted intrusion into a free market enterprise.  We need to get serious again about real banking regulation.