Wall Street Journal
June 24, 2014
From Charles W. Calomiris and Stephen H. Haber’s new book “Fragile by Design: The Political Origins of Banking Crises and Scarce Credit”:
It is challenging to assemble a winning coalition of like-minded people able to overcome the opposition of those that already control banking policy. Crises may mobilize constituencies for change, but powerful interests often succeed in using the crisis to strengthen their power. That was the result in 1913, when the Federal Reserve was founded to facilitate the operation of a fragmented banking system rather than to address the structural problems of unit banking. In the 1930s, instead of addressing the vulnerability of the banking system to agricultural income fluctuations and unit banking—the primary sources of bank failures in the preceding years—bank regulatory reforms further protected small, rural banks by instituting federal deposit insurance and new regulatory limits on bank consolidation. The regulatory reforms of 1989-91 wound down insolvent savings and loan associations and tinkered with regulatory capital requirements without actually constraining banks’ and [government-sponsored enterprises’] abilities to undertake risk at public expense. In fact, banks made ample use of the new capital-requirements framework to build the hidden risks that revealed themselves in the 2007-09 subprime crisis. As of this writing, the reforms introduced in the wake of that crisis have done little to end the subsidization of housing risk, to prevent banks from continuing to abuse the same system of capital regulation to hide risks in the future, or to prevent too-big-to-fail bailouts. Indeed, Title 2 of the Dodd-Frank bill enshrined and institutionalized those bailouts while pretending to get rid of them.