Why Bashing the Banks is Bad for the Economy

Ever since the 2008/9 recession though certainly not for the first time in history, Americans have engaged in vigorous bank bashing, blaming the banks for the recession, and encouraging politicians to fine them, imprison their managers, and constrict their operations via regulations.

Investigating why we hate banks when nearly everyone uses one and benefits from their operation is for some other column. Today we will consider the ties between banks and the economy.

Banks turn the money that the Fed supplies to the economy to a form that is useful for consumers and businesses, ie, loans and investments. Heightened regulation and fines (let alone asking for their managers’ heads) put a damper on bank activity which in turn puts a damper on economic activity. When regulations strangle lending, banks suffer mildly, but consumers and businesses suffer mightily. Fines carve capital out of banks, and yes we’re so glad those nasty banks have to pay all that money to, well, the government who regulated them in the first place – but we also have to realize that those billions evaporate from the lending cycle. That’s what we seem to want: punishments that prevent money from cycling into the economy.

Has no one noticed that there have been NO new banks chartered since 2010, and that hundreds of banks including many community banks have been closed since then and are still failing? Community banks have a far tougher time dealing with all these new regulations. (Here’s a great article on the Chicago banking market from early this year.) Thus, deposits and loan activity have shifted to the very banks Americans most love to hate but seem to use more and more: the Big Four – Bank America, Wells Fargo, Citi, and JP Morgan. These four banks have far greater market share than they ever achieved before the credit crisis.

It is not a coincidence that in our era of strict banking regulation and revile directed towards these entities, the economy is also slow. We need for lending to pick up. We need for small businesses to thrive. We need for large businesses to thrive, for that matter. To get these things, we’re going to have to let up on the banks. Maybe we’re not ready to do that, and if not, we’ll keep paying the price.