Free Enterprise Doesn't Square with Protection

By Nadler, Paul S. | American Banker, July 2, 1984 | Go to article overview

Free Enterprise Doesn't Square with Protection


Nadler, Paul S., American Banker


There is a common attitude that has helped create our recent financial troubles: "I believe in free enterprise. just keep out the lousy competition."

Bankers say, "I believe in free enterprise, but don't let the thrifts diversify."

Thrifts say, "I believe in free enterprise, but the quarter-percent differential under Regulation Q was written in Genesis."

Business say, "I believe in free enterprise, but keep out the imports."

Labor says, "I believe in free enterprise, but the closed shop is part of our Constitution."

Accountants, doctors, and lawyers say, "I believe in free enterprise, but advertising our prices is against all ethics."

And sometimes I feel the only real defenders of free enterprise left are my colleagues and myself: Those of us with tenure, of course. Problems Brought by Attitudes

This hypocritical attitude certainly plays a role in bringing about today's banking troubles.

* Had bankers and thrift executives not fought to keep Reg Q in place, we would not have seen the tremendous growth of money funds. These funds bled bank and thrift deposits and ultimately led to unbridled competition for now-expensive deposits.

* Had the bankers in states like Illinois not kept geographical expansion so constrained, a bank like Continental Illinois would not have had to rely on purchased funds for over 90% of its deposit base. And, as we all recognize, it is this highly volatile nature of the deposit base that helped create the confidence crisis that could have turned into a nightmare.

* Even now we see the "I believe in free enterprise but keep out of the lousy competition" attitude playing a major role in banking despite relaxation of interest rate ceilings and branch and holding company restraints.

Look at money brokers: A court has ruled that the Federal Deposit Insurance Corp. and the Federal Savings and Loan Insurance Corp. cannot limit insurance on brokered deposits. So we are back to the situation where some banks and their large depositors enjoy the freedom to run their organizations as they wish -- taking all the risks they want to enhance income -- yet relying on the government to bail them out in case of trouble.

How can a banker scream for freedom to do what he wants when he is relying on brokers to spread his personal funds around among banks and thrifts -- some good, some not so good -- with the knowledge that, in case of trouble, he is relying on the FDIC and the FSLIC rather than his own judgment?

How can a bank or thrift take deposits from brokers, knowing full well it is the "Good Housekeeping Seal of Approval" on deposits up to $100,000, rather than the institution's policies, that is bringing in the money? Then they complain that the regulators are limiting the institutions freedom to act.

Similarly, when the Continental Illinois confidence crisis forced regulators to guarantee deposits -- large and small alike -- how could the bank of its depositors expect to be given continued freedom to plan loans and investments and solicit deposits without restraint? It is, after all, the government's guarantee that is providing the deposit lifeblood of the institution.

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