Monday, June 4, 2012

European Central Bank President Mario Draghi Wants European Bank Regulation to be More Like – Wait for It – the United States

At Least the Way It is Supposed to be in the United States – Not the Way it Will Be if More Deregulation Takes Place

The banking industry is not like other businesses.  When the banking industry fails it seriously damages an economy, what economist’s call external effects.  People who had nothing to do with banks suffer and the national economy suffers.  The U.S. learned this lesson the hard way in the 1930’s, but it did learn the lesson and instituted banking reform and regulation that protected the U. S. economy until, well until the nation forgot the lesson.

Europe is learning the lesson the hard way. In Greece the banks hold large amounts of Greek debt, and if Greece exits the Euro that debt may be largely worthless, and this will send the banks into insolvency and the economy back to a barter system.  In Spain the bad real estate loans held by banks threatens to devastate the Spanish economy, unless the banks can be bailed out, which they cannot be by Spain, the country doesn't have the resources.

All of this has led the head of the European Central Bank, Mario Draghi to propose stronger banking regulation for Europe.

As the first possible step for a more unified euro zone, Mr. Draghi called for "a banking union," entailing a euro-zone level fund for resolving failed banks, a euro-zone level deposit insurance guarantee scheme, and banking-sector supervision that is more centralized on a European level.

This is, of course, what the U. S. has, or is supposed to have.  It is what we had after the Great Depression.  But then everyone believed the bankers when they said they had learned their lessons, and the Federal Reserve in particular under Alan Greenspan essentially abrogated its regulatory responsibility.  It left regulation to the ‘market’, and we all know how that turned out.

If Republicans take control of the U. S. government then removal of bank regulation and oversight will accelerate.  The impact will not be immediate, but it will come eventually and it will be harsh.  This will prompt the leaders of that future generation to ask the inevitable question, “What was wrong with you people?” which will lead to the inevitable answer, “greed and stupidity, what did you think was wrong with us”.

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