What’s Inside America’s Banks?

by Christopher Paul on January 3, 2013

The Atlantic published a very long article on America’s banks. I wanted to share this part I think is rather meaningful (emphasis mine):

A crisis of trust among investors is insidious. It is far less obvious than a sudden panic, but over time, its damage compounds. It is not a tsunami; it is dry rot. It creeps in, noticed occasionally and then forgotten. Soon it is a daily fact of life. Even as the economy begins to come back, the trust crisis saps the recovery’s strength. Banks can’t attract capital. They lose customers, who fear being tricked and cheated. Their executives are, by turns, traumatized and enervated. Lacking confidence in themselves as they grapple with the toxic legacies of their previous excesses and mistakes, they don’t lend as much as they should. Without trust in banks, the economy wheezes and stutters.

And, of course, as trust diminishes, the likelihood of another crisis grows larger. The next big storm might blow the weakened house down. Elite investors—those who move markets and control the flow of money—will flee, out of worry that the roof will collapse. The less they trust the banks, the faster and more decisively they will beat that path—disinvesting, freezing bank credit, and weakening the structure even more. In this way, fear becomes reality, and troubles that might once have been weathered become existential.

I’m of the opinion the issues that surround banks are far too complex for even a long article like this to discuss. And I think the piece unfairly paints the banks negatively and gets preachy towards the end. There are already a large number of (sometimes ambiguous) regulations to adhere to and even more coming; regulation alone can’t solve a “trust problem” which is were I think the piece fails a bit.

It’s hard to argue that things can’t or shouldn’t be done differently for the better. But we should temper our regulation or de-regulation because, as we’ve seen, there are serious unintended consequiences of changing our securities, derivitives, and banking laws.

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