Believe those who are seeking the truth. Doubt those who find it. Andre Gide

Monday, March 2, 2009

Our "Deregulated" Financial System?

I used to love watching "60 Minutes" as a kid. Unlike "60 Minutes," however, I eventually grew up (although, not everyone around me agrees). Perhaps you have seen their recent report that places the blame for the current financial market turmoil squarely on those that "deregulated" the U.S. financial market; see here.

Is the U.S. financial system really an example of laissez-faire capitalism run amok? This certainly appears to be the bill of goods being marketed by the religious left and other clear-thinking people. It is unfortunate, as far as this view is concerned, that it contradicts reality so violently. The truth of the matter is that the financial market is by far the most heavily regulated sector in any “well-developed” economy.

If you already knew this, there is no need to read further. But for those of you who may be surprised by this, let me document just some of the federal agencies that play a major role in the U.S. financial market. Of course, I don't expect anyone to read what follows carefully: it is far too long to keep anyone's attention for any length of time. But I suppose that this is precisely the point that I am trying to make. Take a deep breath now...

The U.S. Department of the Treasury

Naturally, I begin with the U.S. Treasury. Here is their mission statement:

Serve the American people and strengthen national security by managing the U.S. Government’s finances effectively, promoting economic growth and stability, and ensuring safety, soundness, and security of the U.S. and international financial systems.

Again, in their own words,

The Department of the Treasury's mission highlights its role as the steward of U.S. economic and financial systems, and as an influential participant in the global economy.

If we are to take this seriously, I suppose it implies that the U.S. Treasury takes responsibility for the current global financial crisis.

The Treasury currently consists of 12 bureaus. I highlight the 5 here that have a direct bearing on the financial system. See:

[1] Bureau of the Public Debt

These are the guys responsible for selling and redeeming U.S. government bonds. They are also useful bean counters. If you visit their website, you’ll see that they keep a precise measure of the outstanding dollar value of the U.S. federal debt (to the penny). As of this writing, this debt amounts to $10,877,144,501,237.52. This is almost 11 trillion dollars; or roughly $36,000 per American.

Who is backing this debt? The American taxpayer of course. And of course, not all Americans pay taxes. Children do not pay taxes. Drug dealers and the unemployed do not pay taxes. According to the IRS, almost 33% of tax filers in 2004 did not pay taxes. You get the picture. It is probably not unreasonable to guess that each American taxpayer is on the hook for $100,000. And this does not include “off balance sheet” items, like social security.
Fortunately, the Bureau of Public Debt has a mechanism in place to help deal with this burden. On one of their webpages, they answer the question: “How do you make a contribution to reduce the debt?” Here is the answer:

Make your check payable to the Bureau of the Public Debt, and in the memo section, notate that it is a Gift to reduce the Debt Held by the Public. Mail your check to: Attn Dept GBureau of the Public DebtP. O. Box 2188Parkersburg, WV 26106-2188

[2] Community Development Financial Institutions Fund

Here is their mission statement:

Through monetary awards and the allocation of tax credits, the CDFI Fund helps promote access to capital and local economic growth in urban and rural low-income communities across the nation.

Through its various programs, the CDFI Fund enables locally based organizations to further goals such as: economic development (job creation, business development, and commercial real estate development); affordable housing (housing development and homeownership); and community development financial services (provision of basic banking services to underserved communities and financial literacy training).

In short, this federal department extends credit to low-income high-risk individuals. Where have we heard this before? This department is also responsible for implementing President Obama’s American Recovery and Reinvestment Act of 2009 (Recovery Act). According to their website:

It is an unprecedented effort to jumpstart our economy, create or save millions of jobs, and put a down payment on addressing long-neglected challenges so our country can thrive in the 21st century. The Act is an extraordinary response to a crisis unlike any since the Great Depression, and includes measures to modernize our nation’s infrastructure, enhance energy independence, expand educational opportunities, preserve and improve affordable health care, provide tax relief, and protect those in greatest need.

[3] The Inspector General

Conducts independent audits, investigations and reviews to help the Treasury Department accomplish its mission; improve its programs and operations; promote economy, efficiency and effectiveness; and prevent and detect fraud and abuse.

In short, this department does nothing.

[4] Office of the Comptroller of the Currency (OCC)

The Office of the Comptroller of the Currency (OCC) charters, regulates, and supervises all national banks. It also supervises the federal branches and agencies of foreign banks. Headquartered in Washington, D.C., the OCC has four district offices plus an office in London to supervise the international activities of national banks.

The OCC was established in 1863 as a bureau of the U.S. Department of the Treasury. The OCC is headed by the
Comptroller , who is appointed by the President, with the advice and consent of the Senate, for a five-year term. The Comptroller also serves as a director of the Federal Deposit Insurance Corporation (FDIC) and a director of the Neighborhood Reinvestment Corporation.

The OCC's nationwide staff of examiners conducts on-site reviews of national banks and provides sustained supervision of bank operations. The agency issues rules, legal interpretations, and corporate decisions concerning banking, bank investments, bank community development activities, and other aspects of bank operations.

National bank examiners supervise domestic and international activities of national banks and perform corporate analyses. Examiners analyze a bank's loan and investment portfolios, funds management, capital, earnings, liquidity, sensitivity to market risk, and compliance with consumer banking laws, including the Community Reinvestment Act. They review the bank's internal controls, internal and external audit, and compliance with law. They also evaluate bank management's ability to identify and control risk.

In regulating national banks, the OCC has the power to:

Examine the banks.
Approve or deny applications for new charters, branches, capital, or other changes in corporate or banking structure.
Take supervisory actions against banks that do not comply with laws and regulations or that otherwise engage in unsound banking practices. The agency can remove officers and directors, negotiate agreements to change banking practices, and issue cease and desist orders as well as civil money penalties.
Issue rules and regulations governing bank investments, lending, and other practices.

The OCC's Objectives

The OCC's activities are predicated on four objectives that support the OCC's mission to ensure a stable and competitive national banking system. The four objectives are:

To ensure the safety and soundness of the national banking system.
To foster competition by allowing banks to offer new products and services.
To improve the efficiency and effectiveness of OCC supervision, including reducing regulatory burden.
To ensure fair and equal access to financial services for all Americans.

So you see, how could we expect to see anything to wrong with such extensive government oversight?

[5] Office of Thrift Administration (OTS)

The OTS supervises a national thrift industry that is built on the bedrock of the American dream of homeownership—supplying affordable home financing for Americans from all walks of life.

The industry has a long history dating back to 1831 with the establishment of the first savings association, the Oxford Provident Building Association, which made home loans and offered savings accounts. Today, the charter is a vibrant, sophisticated model for running a retail financial services business.

Home mortgages remain a staple of the thrift industry. However, the array of financial products and services offered by many institutions and their holding companies paint a modern-day portrait of great diversification within the industry based on size, complexity, and business strategy.

Three unique advantages of the federal thrift charter foster this diversification:

Preemption – The federal thrift charter operates under a comprehensive framework of federal regulations that supersede state and local laws on lending and deposit taking activities. This provides a uniform national standard for lending and deposit taking, thereby reducing regulatory burden and increasing the efficiency of operations at thrift institution. This authority supports the delivery of low-cost credit and other services to the public, while maintaining consumer protections and promoting the safety and soundness of federal thrifts and the nation’s financial industry.

Branching – Federal thrifts enjoy the distinctive ability to establish branches nationwide, seamlessly and without restriction, under a single charter and a single regulator.

Single Supervisor – Savings and loan holding companies, and their thrift subsidiaries and affiliates, operate under the consolidated supervision of a single federal regulator, the OTS.
The thrift charter is employed by some of the largest financial enterprises in the world, as well as small, one-office savings associations. Financial institutions from across the nation and a number of international financial firms have found that the thrift charter and the experienced, responsive workforce of the OTS provide an ideal framework for conducting retail banking operations and related financial services activities. The charter enables these institutions to meet the needs of their customers and to innovate effectively, compete, and prosper in today’s fast-paced financial marketplace.

Today’s “fast-paced” financial marketplace indeed!

Other Government Regulatory Agencies

[1] U.S. Commodity Futures Trading Commission (CFTC)

Congress created the Commodity Futures Trading Commission (CFTC) in 1974 as an independent agency with the mandate to regulate commodity futures and option markets in the United States. The agency's mandate has been renewed and expanded several times since then, most recently by the Commodity Futures Modernization Act of 2000.

[2] Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress that maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships.

[3] National Credit Union Association

The National Credit Union Administration (NCUA) is the independent federal agency that charters and supervises federal credit unions. NCUA, backed of the full faith and credit of the U.S. government, operates the NCUSIF insuring the savings of 80 million account holders in all federal credit unions and many state-chartered credit unions.

[4] Federal Reserve Board

Here you go: another fine example of laissez-faire capitalism (a government legislated monopoly on the paper money supply and sweeping regulatory powers). For details, see:


  1. Despite the amount of time that you took to support your argument, it is clear that almost all of these regulatory agencies have failed miserably in protecting our economy and the consumer. Regulations are necessary within an economy and the argument of the economists in 1977 that spearheaded the deregulation of the airline industry have gifted us an airline industry that doesn't provide us with greater ease and service. A decrease in banking fees? Fraid not.
    I was an admninistrative commercial lender in the early 1980's I left the business because of pending deregulation of the industry. People who loan money to corporations and individuals should not earn commissions. It would be ohhhh sooo nice if the current economic problems could be tiued to sub-prime loans. What a world economy doesn't stumble and almost crumble because of sub-prime loans. All sub-prime loans haven't gone into foreclosure, in fact ther majority of them are still paying their monthly mortgage. payments. The giant elephant hiding in corner has more to do with credit default swaps and meg-investment houses making short positions on bundled loans which in turned triggered a run on the insurance company (think AIG) that were bought to protect these assets.

  2. Spicey:

    Yes, it seems clear that these regulatory agencies have failed in some manner. But this does not undermine my argument that the financial sector is the most heavily regulated sector in the economy. Moreover, one could make a strong case that the regulatory environment contributed to the crisis (moral hazard, etc.).

  3. If you want to argue that one sector is more "heavily regulated" than another, then you are obligated to define some concept by which regulation has quantity or "weight" (to continue the metaphor), and then some observable metric of that quantitative property.

    If you had some observable metric for the quantity of regulation, we might go about rank-ordering one economic sector against another, with regard to this metric. And, we might track, historically, changes in how heavily regulated an economic sector. (Never mind defining a "sector".)

    Your only metric appears to be an enumeration of U.S. government agencies with some responsibility relating to finance, including the chartered monopoly, which manages the currency and national debt.

    Your original claim was: "The truth of the matter is that the financial market is by far the most heavily regulated sector in any “well-developed” economy."

    Yet, your argument fails to provide evidence beyond the single example of the U.S., and no evidence regarding a comparison to other sectors. Military and police? Medicine and health care? Road building, anyone?

    I have no problem with anyone feeling superior to television journalists, who have twenty minutes minus commercials, to explain everything and sound authoritative, compassionate, wise and all-knowing, while doing it. If it floats your boat, go for it. But, if someone reads your blogpost, be prepared to feel embarrassed.

  4. Bruce:

    You raise a valid point. And anyone who maintains a blog making public their thoughts on various matters must be prepared to feel embarrassed on occasion.

    I do not, however, feel embarrassed about this post. And I cannot help noting that you did not provide any quantitative evidence rejecting my statement.