Steering a Course through a Sea of Fear and Technological Change
Wriston, Walter, American Banker
Whenever we talk about tomorrow, there is a natural tendency to make straight-line projections based on the facts we know now, or so start the reasoning process from some partisan base we wish to protect from the rigors of competition. The fallacy and danger of both methods abound in our literature. They range from Thomas J. Watson's early estimate there was a world market for about five computers, to a warning in 1933 by John T. Flynn, an advisor to the Senate Committee on Banking and Currency, that "branch banking will mean the beginning of the end of the capitalist system."
Since the air is constantly filled with dire predictions of all kinds, a sense of history is often a helpful antidote to alarms of the moment. This kind of perspective helps us to contruct a useful frame of reference, to distinguish among the testimony of many witnesses.
One of our great historians, Pultizer Price-winner George Dangerfield, had a very clear sense of the different kinds of information that run through the flood of data to which we are exposed. He believed that confusion results from the failure to learn to distinguish among three quite distinct things: "contemporary journalism, a sermon, a chill down the spine."
Today the financial service business is constantly exposed to all three: Contemporary journalism is chronicling the events and opinions of the day, we are getting a lot of sermons about the dangers of deregulation, and the chill down our spine is supplied by those pundits who regularly predict a worldwide financial disaster. As we try to think through where we may be going, it is useful to attempt to distinguish fact from fiction, fear from opportunity, and real economic danger from political opportunism. Start with the People
In a democracy, it is appropriate to start the process with the people. To coin a phrase, one could ask: Are you better off today than you were before deregulation? We all know that interest rates are higher now than in the recent past, and the implication in most of what is said and written is that this is not only a product of deregulation, but it is bad. The real question, however, is not whether this state of affairs is good or bad, the real question is, who benefits from higher rates? Few have asked this question, although it has a very clear answer.
Department of Commerce figures show that in 1979, before interest rates were deregulated, American households earned about 7% of their total personal income from interest on their savings; and that by 1981, after rate deregulation, the interest American households were earning on their savings rose from 7% to 10%. This figure has undoubtedly grown even more by now -- indeed, the Economist estimates that earnings on savings now represents 14% of personal income.
Government figures also show that over this period the interest that households pay on mortgages and loans, as a percentage of their growing income, has remained constant at 6%. What all this means is that the difference between the interest people earn and the interest they pay has multiplied from 1% of personal income before deregulation to 4% after. In the aggregate, consumers have earned about $95 billion more than they paid out in interest on loans and mortgages, and this number should rise to $135 billion this year. Anti-Consumer Stand on Wall Street
There is, therefore, no question that households as a whole gained a great deal more than they lost from deregulation of rates. What is unusual is that some competitors of commercial banks, such as Wall Street investment banks, have taken the anti-consumer stand that interest rates should be reregulated. This is unbecoming to people who make their living in the money markets of the world.
The sermons we receive are eagerly repeated, and tend to take for their texts two broad categories: imprudent loans and capital adequacy. All sermons delineate the classic dilemmas of life, and are not limited to financial institutions but extend to the many aspects of family, of business, and politics. …