US bank regulations, what does it mean?

As reported yesterday by the AP, US Federal Reserve Chairman Ben Bernanke defended his plan for increased regulations on US banks. The US has the most progressive and capitalist banking system in the world. There are over 8,000 commercial banks in the United States but, the problem is not the amount of banks but, the lack of government regulation there is in the industry. In late 2008 and throughout 2009, we heard a lot about the phrase “too big to fail”. This was used by the US federal government and the Federal Reserve to describe how large and important certain American companies, mostly banks and other financial institutions have become in the US and throughout the world. This partly occurred due to low regulations. Big banks were able to participate in a type of speculation bonanza where everyone assumed that houses will only increase in value. They then, allowed home owners to borrow money against those houses multiple times and then bought and sold financial instruments based on these false assumptions.

For some time this worked very well for them and along with other banking and investments these companies made, some of which were a lot more practical and lower in risk, these companies grew to be the giants they are today (or at least were before the housing crisis). When this bubble burst, the government realized that if one of these giants were to go bankrupt, as was the case with Lehman Brothers (this is when the crisis began), then it will take the economy with it.

The thought by the Obama administration and the Fed is that tighter regulations need to be put in place to prevent the type of speculation that these companies participated in and also to put some sort of limit for how large they can become. These measures all seem to make sense, especially since it looks like the lack of these rules helped make this recession as bad as it was. Some people argue that this will not help and because there were some regulations already, it meant that companies were not able to be in complete control of their situations and that made it difficult to succeed. They feel that what should be done is remove government from this equation even further and only then the market can truly work as it should.

Right now I am leaning more towards agreeing with the President and Fed Chairman on this particular issue, but I am open to hearing other opinions. Regardless of whether you agree with the left or the right on this issue, what seems obvious is that when it comes down to deciding how to make the current “too big to fail” companies smaller so that they don’t hold our fate in their hands anymore, it will create a lot of tension and arguing and will be very difficult to actually do. This is an interesting story to follow and I will have more posts on this as note worthy events happen.

This is a touchy subject right now for many people however, because it gets to the heart of competing ideologies of government involvement in private business. Some, on the political left say that there has been not enough government presence in the private sector and this argument has been proven to be true in this recession. On the right side however, they say that low regulations were not the problem, but rather too much government influence and in the wrong ways. This argument is still plausible to some degree and in certain circumstances, but it was a President from that political ideology, Pres. George W. Bush that had no choice but to begin the bailing out of these mammoth companies. A government bailout means that the government and therefore, taxpayers are loaning these companies large sums of money to keep them in business. They only bailed out companies that were said to have been too big to fail. That is, if they were allowed to go bankrupt, the harm it would do to the economy of the US and likely the entire world would be so much that it would bring on a much worse economic situation.