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In recent
decades politicians have increasingly followed the Keynesian prescription of
economic growth through continued government borrowing and the creation of
undreamt of amounts of fiat money by central banks. To facilitate this
process, the larger commercial banks have acted as the central banks' de
facto distribution system, and as a result have grown ever larger while
accepting progressively greater risks.
In 2008,
potential catastrophe loomed as the entire international financial system was
challenged with collapse. But, as the 'darlings' of the central banks, the
"too big to fail" banks were saved by taxpayer bailouts so that
they could continue to play their role in the stimulus engine. But as a
result of these distortions, the environment for those banks outside of the
exclusive "too big to fail club" has been increasingly challenging.
In the United States, the financial services industry is changing radically
and many fear that the days of U.S. dominance will be coming to an end.
Public ire
resulting from the 2008 financial crisis largely missed politicians and
central bankers and landed squarely on "Wall Street." As a result,
bankers have become easy political targets. Increased regulation of the
banking sector has become the rallying cry for the political left.
In addition
to direct assaults on the banks, the ill-designed 2010 Dodd-Frank financial
overhaul law has raised considerably the cost of entry to small
entrepreneurial financial companies. Already, it is forcing the business of
smaller financial companies offshore to the benefit of other countries.
Daniel Tarullo, an influential executive at the Federal Reserve
Board, has suggested curbing bank growth by demanding a limit on the
non-deposit liabilities of banks. Too often, short-term debt comprises the
majority of these liabilities and is a source of potential vulnerability in a
credit crunch. Meanwhile, some politicians have urged higher capital
requirements in order to curb increasing bank size. Even ex-bankers such as
Sandy Weil who led the lobbying effort to abolish the Glass-Steagle Act are now calling for its effective
restoration. As a result, many corporations are deciding to leave the banking
sector.
Companies for
whom banking services provide an added benefit to their non-bank clients are
fearful of the threat of increased capital requirements and of new, as yet to
be clarified, Federal Reserve banking regulations. As such, it is a classic
example of how excessive and uncertain regulations are hurting American
business and employment. A specific example is that of tax preparation firm
H&R Block. Years ago the company launched a service that provides some
banking services to its customers. Recently they re-evaluated that strategy
and have engaged advisors Goldman Sachs to help them "evaluate strategic
alternatives." In other words, they are looking to shed the unit.
Those large
banks that remain, firmly entrenched and supported by government guarantees,
see little reason to provide cost effective services for retail clients. Most
people with bank accounts in the United States will likely agree that in
recent years banking fees have gone up while the level of service has gone
down. This has resulted in private enterprise proposing innovative solutions.
Recent moves by retail giant Walmart provides one
example.
The Federal
Deposit Insurance Commission (FDIC) pointed out some weeks ago,
some 51 million Americans are "under banked". Worse, about 17
million are "unbanked". This implies a massive potential need for
banking services for individuals at the lower end of the socio-economic
spectrum. Many such Americans do a great deal of their shopping at Walmart, which purveys a wide variety of merchandise at
extremely low prices.
To provide a
service to these potential customers, Walmart has
announced an agreement with American Express to issue a prepaid debit card
entitled 'Bluebird'. This will enable less well-off consumers to purchase
products from Walmart without surrendering their
paychecks to a bank, thereby exposing themselves to high banking fees, or to
put their purchases on conventional credit cards, which are notorious for
high fees. As the service involves no extension of credit, Bluebird should
provide cost effective service to the poor while involving no financial risk
to either Walmart of American Express.
While Walmart's efforts may be timely and successful, the move
will not reverse the fading glory of the U.S financial services sector. In
order to perpetuate its system of massive money distribution, the Fed has
insured that American banking will become as competitive domestically and
globally as American manufacturing, which is to say, not at all.
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