Another Mis-step in Reactionary Regulation

Cite this Article
Michael E. Sykuta, Another Mis-step in Reactionary Regulation, Truth on the Market (December 16, 2009),

Today’s Wall Street Journal reports that Senators Cantwell and McCain are preparing legislation to reinstate Glass-Steagall-type restrictions to create a “firewall” between commercial and investment banks. Apparently Rep. Hinchey is preparing a similar assault in the House.

The purpose behind the proposal, according to Ms. Cantwell, is so that “banks will stop diverting resources to Wall Street speculation and get back to more business lending to main street.” Mr McCain wants to “ensure that never again we stick the American taxpayer with another $700 billion or even larger tab to bail out the financial industry.”

Perhaps instead they should spend just $0.25 and buy a clue.

Let’s start with Ms. Cantwell’s concern for the ever-elusive “main street.” Affording the benefit of the doubt, I presume Ms. Cantwell is referring to small business in general, that sector of the economy that is traditionally responsible for the majority of job creation in the US. But to whom do most small businesses sell? Answer: larger businesses. And what does all that speculative money on Wall Street do? Reduce the cost of financing–either directly or indirectly–for (sometimes larger) businesses, which makes them more likely to grow their own businesses and purchase more things from smaller businesses. Not to mention that large businesses also hire people and are more likely to provide them health benefits (an added bonus in our political point count). Imposing restrictions that reduce financing options for large businesses may, in Ms. Cantwell’s world, mean more money to lend small businesses, but in effect it means small businesses have fewer opportunities to sell their wares and therefore have less need of financing.

As for Mr. McCain’s concern about ensuring we don’t have another $700+ billion bail out, there is a much easier solution: Just Don’t.  First, “just don’t” spend another $700 billion of tax dollars to bail out the banks (or the auto industry or … well, you get the point).  And as, if not more, importantly, “just don’t” impose financial market distortions (such as federally-subsidized mortgages to sub-prime borrowers) in order to achieve political and social engineering goals.

The media consensus seems to be Congressional leadership has no interest in the Cantwell-McCain proposal. Let’s hope they get this one right and this proposal dies a quiet death.