Regulations have kept consumers safe
As the frequency of big bank scandals grows, it is clear that bank regulation means self-regulation. State and federal regulators are unable to evaluate bank assets when bad assets (loans) are hidden among branches outside the examiners' awareness. This is why Continental Bank failed. That failure is where the "too big to fail" idea was first used.
Why are some big banks "too big to fail"? The Great Depression has showed what was needed to restore bank safety. Congress passed the now repealed Glass-Steagall Act. When Glass-Steagall was enacted, banks (unlike now) were limited to banking. They could not operate management consulting, brokerage or insurance businesses. Then there was no conflict of interest. Then, unlike now, regulators for quality and performance could grade all bank assets. Home loans then were the province of the now-gone savings and loan industry.
Is the picture getting clearer? After decades of community lending, S&L regulations were expanded. Commercial lending opened. Unrelated business was allowed and territory limits vanished. Banks took over surviving S&L deposits and trusted the government. This "trust the government" was the problem. Rather than use sound lending practices, the two federal mortgage loan guarantee programs required that banks lend to borrowers they knew were unable to repay the loans. If banks refused, Congress said they should be punished by withholding branch, merger and ATM privileges. Congress lied when it said the bad loans were safe.
Today, where possible, cleaned up failed banks are merged into other banks. The bad loans are taken by regulators and charged against "insurance" with premiums that are paid by member banks. Nobody goes to jail. In short, we have been once more set up for a second massive monetary collapse, because the controls that could have prevented this have been taken away.
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