Why 2015 Was a Bad Year for Banking Reforms — Oz Shy

MIT Sloan Senior Lecturer Oz Shy

MIT Sloan Senior Lecturer Oz Shy

From Fortune

Here’s what to watch in 2016

This year is ending the way it began for taxpayers without any sign of relief from the repeated burden of bailing out the banks during the financial crises and continued pressure to modify the Dodd-Frank Act in ways that favor bankers and lessen protections for taxpayers.

A year of continued concessions to the financial industry included: delaying a Dodd-Frank mandate that financial firms sell off bundled debt, known as collateralized loan obligations; exempting some private equity firms from registering with the Securities and Exchange Commission; and loosening regulations on derivatives. The recent requirement that banks increase their capital ratio to 16% or 18% in the next few years still leaves the taxpayer responsible for the remaining 80% of the losses.

Given that banks spend over $1 million per week on lobbying, is there any point in even raising the question of whether 2016 — a presidential election year — will be different? Judging from the past 85 years (since the Great Depression), it seems unlikely that politicians will begin to favor consumers over bankers who make plush campaign contributions.

So without proper, or at least more aggressive regulation, it is worth starting this new year asking the most pertinent question: What can we do to shore up our banking system? The answer is simple: replace some part of the current system with a non-bank alternative. Let me explain.

During the 1930s, after observing the total collapse of the banking system during the Great Depression, a group of economists at the University of Chicago, followed by Irving Fisher from Yale University, tried to convince President Roosevelt to separate deposit-taking activities from lending activities and to embed this separation into the 1933 Banking Act.

Read the full post at Fortune.

 Oz Shy is a Senior Lecturer teaching economics at MIT Sloan School of Management. He has published three books: How to Price, The Economics of Network Industries and Industrial Organization: Theory and Applications.

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