Albert M. Wojnilower
A banking system able to share risk is critical to the progress of the private sector, and hence to economic growth. Because of the failure to regulate our financial institutions properly, we in the United States have undermined the ability of our banking system to support and foster the development of novel or unstandardized--in short, risky-- private enterprises. This means that economic development will be slowed and that future generations will be disadvantaged.
The technological changes in the financial sector have been enormous. When I was a freshman at Columbia in 1947, I was the only one in my economics class who knew what a checking account was. Today, almost every student has a checking account and probably a credit card, too. Credit cards, except of a specialized sort, were unheard of as little as twenty-five years ago.
Checking accounts, credit cards, and many other technological advances have had enormous effects on what types of financial institutions make sense and are efficient, and on the appropriate regulatory environment. Regulatory change has not kept up with technical change, and its failure to keep up is, in many ways, responsible for the current sorry state of banking.
Our current regulations developed when people had to carry cash. Before credit cards and personal checking accounts, it made sense to have a multitude of financial institutions, operating mostly very locally. Legislation encouraged two or three competing banks in each local area. In the United States cultural framework, which has always been suspicious of the power of money and monopoly, it was natural to have regulations that assured active local competition.