Joseph Steelman
Right now, our country is in the process of passing legislation that many see as badly needed reform in the financial industry. The reform comes as a reaction to the most recent banking crisis, which sent the world economy into a tailspin.

As we climb our way out of this recession, the last thing we need is monetary policies that would stagnate private capital flow. The second-to-last thing (but if anyone would like to convince me it should at the top of my list, I'd be willing to listen) we need is a rise in the costs of necessary consumer products. Financial products like savings and checking accounts exhibit relatively inelastic demand trends, which gives the producers of those products, the banks, better pricing power. If the proposed regulations are enacted, financial institutions across the nation will incur new costs. My bet is that at least a substantial proportion of those costs won't come out of their profit margin — they will come out of our pockets.

A recent article in the St. Louis Beacon debates the pros and cons of the proposed regulations. In the article, Dr. Joseph Haslag, the Show-Me Institute's chief economist and an economics professor at the University of Missouri–Columbia, points out that the proposed regulations miss the mark.
"It's not the derivatives or the swaps or any of the other complicated financial contracts that are problems by themselves," said Haslag, who holds the Kenneth Lay chair in economics at Mizzou. "They are mechanisms that parcel out risk. People see these as ways to make big gambles, and there are risks in the world. If you line up your gambles all in one direction, and the risks come out in a certain way, you can lose a lot of money."

As people in the finance industry seek to maximize their profits, they will find ways around the new regulations. It may very well be the case that these regulations force bankers into even riskier behavior that is outside the scope of presently foreseeable action. The government has no way of knowing or policing the instruments that may be developed next. In fact, by mandating this type of regulatory environment they might very well cause a new variant of the type of behavior they were trying to quash.

As regulatory protocols are activated, the banks with the best chance to survive the rough waters are the the same banks that were implicated in the financial crisis in the first place. On the other hand, small community banks that keep capital localized will have a tough time staying afloat. This is all trouble for consumers.

Yesterday, the Wall Street Journal ran a piece titled "The End of Community Banking. From the article:
What does all this mean for our customers? Less credit will be available, costs will increase, and we will be less able to make loans to regular people who were creditworthy in the past. This is the perfect storm for the small retail banking customer.
Small community financial institutions care about the people in their communities. Unfortunately, the new financial regulatory reform bill will greatly inhibit our ability to help them.

About the Author

Joseph Steelman