tv Mark Rose Market Rules CSPAN April 29, 2019 5:15am-6:47am EDT
the banking industry. >> that afternoon. welcome to the american enterprise institute and today's event "market rules" a discussion with professor mark rosen. my name is paul cousy i can i'm a resident aei scholar specializing in financial services. the structure of the american bank system a handful of large
supermarkets institutions and thousands of smaller community banks is the result of more than a century of political dealmaking. in early 1930s fdr's new deal reforms included the glass-steagall act a law that created federal deposit insurance and for more than 50 years separated commercial banks from investment banking activity. federal deposit insurance government controls on deposit interest rate and protection from competition from the mid-1930s through the 1950s among the best of times for small community banks. still underlying market forces favor the poor nation of large regional banking groups, innovative holding companies like the transamerica corporation and abetted legal ways to assemble large interstate banking conglomerates are tensely creating a new source of competitive pressure for small-town banks. community bankers fears only
steep and when the federal reserve boss's 1940 lawsuit to try to break up transamerica charging that transamerica had violated the clayton antitrust act. but the fed is never been stymied by the limitations of the law passed by congress so that ed and his supporters set out to change the law. 1956 congress gave the federal reserve power dampen federal competition but passing the bank holding company act. circa 1960 the u.s. had nearly 13,000 independent banks are the largest 10 of which held about 22% of all u.s. deposits. in the early 1960s but ranking business began to change. change was slow at first but the pace accelerated in the 1970s, 80s and 90s. today the bank industry looks a lot different than it did in
1960. there are far fewer small community banks and a relative handful of very large institutions that don't commercial banks investment banks and other financial operations, so-called supermarket financial institutions. at the end of 2018 there were less than 4700 banks in the u.s. and as of december 2017th forbes calculated the 5 largest banks held almost 42% of all u.s. deposits. the system has gotten much more concentrated. in his new book marker rules professor mark rose tells the story of the politics that pushed the financial sector to transition from its composition in 1962 the structure it has today. mark rylance changes their world they made possible through the efforts of influential politicians bankers and government banking agency officials. a reoccurring scene in the story
is that the transition was no easy task. the road to financial or modernization had to overcome the protectionist interests of community bankers insurance agents and the lingering progressive suspicion that concentration in banking favorite coastal elites at the expense of mainstream america, things you still hear today i think. with that short introduction may that may explain the plan for today's event. we will ask professor rose to give us a brief tour of this book "market rules" in xp it to noted experts who have read mark's book and will share their views with us. speaking first among the experts will be richard sila the henry coffman professor of history and financial institutions and markets at new york's two cities turned school of business the next is distinguished fellow alex pollock to share his views. following that i will moderate a discussion with today's feature -- the granting questions.
now i'm pleased to introduce this afternoon's guest author. mark rose is a professor of history at florida atlantic university and author the author of more than 40 academic articles and history related journals and several books. he is the coeditor of the book series american business politics and society pollack -- published by -- and several professional associations and journal editorial warts and with that short introduction please join me in welcoming professor mark rosen. [applause] >> thank you paul for that nice introduction and thank you all for coming over here. i appreciate the opportunity to talk a little bit about the book rather than trying to provide an overview what i chose to do was to talk about jim hensarling who spoke here in 2017 and its
conclusion of the book and it ties together, provides an opportunity to link together a number of things. in july of 2010 president barack obama signed the dodd-frank act. it had more than 840 pages in length. obama congressional authors left parts of bank regulation unfinished brick to complete dodd-frank lawmakers directed the comptroller's office the federal reserve and other bank regulatory agencies to prepare nearly 400 detailed rules. rulemaking was not the stuff of newspaper headlines and lead stories on tv news. pick lance topics like appropriate measures of the banks capitol adequacy was the leadership of this consumer financial protection bureau would never enlist and hold a large idea and yet the
dodd-frank act foster passion for the bank crisis of 2008 and job losses and home foreclosures that i would remain vital topics for lott years and illicit painful memories for millions of americans that extended into the next decade. all of a sudden the process of dodd-frank rulemaking opened another pretending for regulators and lawmakers to restrain bank or speculation arguing for more bank lending and offering community bankers a hand up against a super make it -- supermarket banks. the mindnumbing bankrolls carried a monthly explanation to anyone involved in the process. i think i would fancy points is heating up first disputes about bank legislation and regulation enjoyed a history in american
politics starting with john kennedy in 1961 and extending to donald trump. every president in a date promoted legislation and legislation intended to foster creation of large banking. i characterize these banks is supermarkets because they provided a variety of financial services in one place. dodd-frank's authors included timothy geithner who sought to head up the next bank crisis and maintain supermarket banks at the center of the american financial economy. my second is that new bank legislation and regulation always encourage strenuous opposition. between 2010 and 2017 as this evening to sample representative thomas hensarling led a growing opposition to the dodd-frank act hensarling ideas held up the possibility that community bankers will once again achieve
a privileged place in banking hierarchy. reversing decades of decline events of lawmakers and supermarket bankers. this volatile setting the volcker role which limited bankers ability to trade with their money was tailor-made for hensarling inductor dodd-frank critics during obama's presidency. my third point is that supermarket bank advocates and opponents identified markets as their old. i characterize their rhetoric as market talk. just hensarling proved especially skillful at constructing that talk. two experiences informed hensarling's politics prefers hensarling grew up in a household infused with anti-government rhetoric. in 1964 when hensarling was seven years old his parents supported eric goldwater for president. goldwater championed ideas such as diminished federal spending
in a sharp reduction in the number of federal roles but hensarling's mother cried when goldwater lost. hensarling credited professor phil gramm of having exerted the deepest influence on his antistate thinking produce a student in grants courses hensarling told the writer in 2009 is at least the how free-market economics provided the maximum good for the maximum number. graham is also the author of the second theme that an formed the young hensarling. graham according to hensarling demonstrated the meaning of being a republican. hensarling never defined that term for journalists or lawmakers. most like we had to do with hensarling's admission of grams well-honed ability to translate marketplace obstructions into pithy sayings about pocketbook issues.
starting in 2003 hensarling to these ideas about government and the economy to the u.s. house. hensarling as before advocated for a federal government that was smaller less intrusive than less costly. not even lehman's 2008 a good thing unraveling of financial arrangements moved hensarling to change his mind about government spending. in october 2008 p. voted against the 700 million-dollar bill refusing urgings of president bush and congressional leaders from both parties. hensarling adopted the tea parties view. the program of cash at chechens and loans to banks amounted to the opposite of the dynamics of entrepreneurial capitalism. the obama administration and congressional democrats hensarling added used tarp funds to fans or social and political agenda. hensarling expressed fear
regarding what they are attempting to do to my country. obama democrats hensarling judged fostered suspect undertakings. in june the tea party activists enjoying greater prominence and clout among republicans hensarling introduced legislation to terminate the tarp program by years and paid obama and house democrats would never approve such a thematic trains. november 2009 a popular writer characterized hensarling as the gop's most powerful nobody. hensarling committed to a long-term strategy of delegitimizing repealing obama's major legislation but the dodd-frank act in the poker world resided at the top of his list. in 2014 republicans have the majority of house seats and hensarling assumed the chair of financial services.
angry tea party voters and slow-moving economic recovery contributed to republicans electorally successful or in january hensarling held hearings entitled the impact of the volcker role and job creators. world kept bankers proprietary trading at 3% of capitol. many or most americans lack familiarity with its limitations as well members of the house committee could not simply repeal the rule. instead hensarling used hearings to focus journalists and supporters attention and government regulations that hit main street and regrettably the poor and downtrodden amongst us. johnson so concerned about systemic risk and how regulatory agencies will work together could never match hensarling s'more quotable assertion that the volcker role would take $500 billion out of the economy.
remote federal regulations and constituents anger about federal bailouts and an overriding interest in maintaining both hands on a wildly economic and social ladder. during 2016 and a presidential election hensarling of -- relied on sharp wit. in a march american banking association leaders held a summit in washington d.c.. the dodd-frank act hensarling told audience members should be called the obama financial control law. whatever name the legislation imposed incomprehensible complexity and more government control. working families hensarling warned his listeners have seen their pay checks ranked by more than $1600. hensarling is saying fully adept at linking obscure bank
regulations to the growing perception among voters at the federal government awarded favors to the undeserving and failed to help decent americans like them. at that talk hensarling brought a special message to smaller banks. i will not rest until dodd-frank is rep buy its roots and tossed on the junk heap of history. hensarling assured audience members good listeners always attuned to use would have heard and read toned down versions of these remarks many times. as the next election approached hensarling needed to build enthusiasm among bankers and other likely support is. hensarling comprise one of the most ritualized features recruiting and motivating small banks ended dance of legislative
effort like repealing dodd-frank hensarling met with donald trump the republican party said nominee pick trump in hensarling spoke a trump tower for the discovered a common animosity toward dodd-frank. in campaign stops in interviews trump made the dodd-frank target. in january 2016 interviewed on fox tv he described todd frank is a disaster in so many different ways. the nation's banks were totally regulated to a point where no banker is controlling their own bank. the result of these regulations trump asserted with the tanker stop making loans to small to this people. in october at a campaign stop in charlotte trump blamed democratic nominee hillary fenton for lifting
glass-steagall in pushing so prime lending and in turn brought us the financial recession. more at really hillary clinton's husband president del quintin have promoted passage of the ramily to politely act of 1999 for perhaps trump did not realize or did not care that hensarling's mentor phil gramm beta key parts of president clinton in the act does assuring supermarket banks to legal completion nor did trump seem to recognize that ramily to politely's complex rules have played little or no role in bringing about the financial crisis of 2008. in right measure trump sound of eye cancer link who said 20 tenent decried regulation there reportedly armed bank graham barr were like that hensarling did not offer an abrasive drums candidacy but dodd-frank
presented them with a common legislative vinin. here's something that both the great hensarling told the tv audience after the inning. the dog -- dodd-frank act contributed to middle income people are meaning trap and mindnumbing replaces capitol on the sidelines. every president present starting with board made similar points about the federal government rules and their supposed connection to slow growth. he advances clearing congress based on an identical argument that opposition to the federal government and its rules at derailed the beneficent workings enjoyed a monthly history in american political maneuvering. in its latest iteration hensarling product key rhetorical skills to the formidable task of eliminating the volcker role and the dodd-frank act. in september 2016 hensarling file this financial choice act.
that title evokes an image of consumers to conducted business with financial supermarkets that would at long last operate legal and institutional constraints. in truth hensarling's proposed legislation included places like risk-weighted assets that only financial specialists would understand that hensarling asks for dodd-frank britain actually hensarling and two eliminate the volcker rule and increase the oversight of the federal reserve and the consumer financial protection bureau another group of favorite republican targets. stine for economic growth for all hensarling announced in one of his quick talking points. with the campaign in full throttle nobody apparently told hensarling or top of the dodd-frank act had for so many net areas outcomes at one time
onto american business or how hensarling equally complex financial choice act would relieve those evils. unlike trump however hensarling was articulate rhetorically disciplined and always insistent about the economic effects certain to follow when market-oriented bankers replaced that all regulators in the allocation of capitol. in 2016 donald trump was elected president. that same month a fortune writer described hensarling as washington's newest power player for a day or two journalists reported that trump's top officials were considering hensarling to the post of treasury secretary. thompson aides according to a news report like hensarling's free-market background in gop ties. hensarling and trump are allies in the editors in businesses denouncing the dodd-frank act in the over rule and promising faster economic growth.
trump however it should do subtle changes in his approach to bank politics. first jamie dimon of birds is the presence banker and informal position held in the past executives such as citibank's walter rusin and nations bank yuma cole. starting in the 1980s diamond had served as a top officer in sandy whilst worldwide financial and higher and that is presence of the gigantic jpmorgan chase. 2017 diamond was the only topics that you give who remained active when building supermarket tanks was in vogue. nothing in diamondback round temporary responsibilities suggested anything as dramatic as the faster modeling of the rules that framed the american financial architecture. bankers including diamond spent
hillings to adapt their operations to conform to dodd-frank's rules. rather than the abolition for radical diminution of regulation the largest bank such as diamonds in the bank of america ceo ryan lenihan sought to bring european and u.s. bankrolls into closer alignment of questions on how to measure capitol adequacy. trump's second change regarding bank policies with still more understated. trump pointed daily cone head the international counsel. 1993 president clinton i created that post and appointed robert rubin to head it. like rubin colin so former top official at goldman sachs where he directed financial operations around the world. given it background and trump's priorities colin plan to modify regulations in the way that increased funding and maintain the dominance of the largest u.s. banks in the world
financial system. the united states has a huge competitive in an age he told a tv interviewer and we want to preserve that advantage for two years before alan greenspan or robert rubin had sought to maintain that international advantage. the idea of american banks as major players in the world economy dominated financial policymakers agendas in every administration from reagan to trump. admit february 2017 month after trump's inaugural and longtime observers and bank politics dismiss hensarling and trump's prospects for eliminating the dodd-frank act. those observers use terms like slop to describe the substantial efforts than any presidents treasury secretary would face in seeking a large overhaul of bank
regulation. dodd-frank's tentacles will won't be easily cut a writer for an insurance oriented publication noted that month. the supermarket bank continues to reside at the center for presidential project more than five decades old and yet if anyone less emerges from supermarket bankers consent in american politics was that no outcome was certain or navigable patronization of american banking and the markets that they made remained a matter of grinding politics. history governed its banking institutions but few recognize its presence in their daily lives. this connection was part of the american style of politics except it was time to apportion blame or gain an advantage. hensarling's moments to gain that managed -- on may 232017 bank politics achieved a linkage
between past and present. jeff hensarling said. this room for interview. aei's peter walton conducted that conversation. between 1981 and 1985 wallison had served as general counsel to the treasury department and in a position of vice treasury secretary donald reagan about legal and legislative strategies to win congressional authorization to create supermarket banks. wallison and reagan failed to bring most of those plans to fruition. hensarling and wallison as everyone in the room probably recognize representative to generations of federal officials who have dedicated their professional lives to the idea that reduced taxes and fewer bank rules would hasten the pace of economic growth. through the interview hensarling fomented the length volume and
complexity of the dodd-frank regulatory burden per during president obama's time in office the joyous day when bankers experience fewer rules would reside in the future. with trump in the white house and the majorities in both houses hensarling had a window to pass the financial choice act to market top-of-the-line which hensarling used to deal with the legislative coalition. starting in 2010 hensarling's job as he designed it had been to mobilize bankers and fellow lawmakers behind the effort to eliminate the dodd-frank act and its volcker rule. hensarling's appearance at aei was another stop in that effort. hensarling had audience members expected referred often to the markets diamond-ism -- dynamism and transformative concepts and market discipline was another pickup market discipline hensarling report it prevents me
from having to pay $50 for a hamburger instead of five. years in office did not diminish and sureley's skill at articulating down humphries is the suggested the uselessness of most government programs. and hensarling's hands they found an audience in contemporary americans. senator graham with that same with purple skill. phil gramm president ronald reagan and citicorp president walter reston had an invisible presence in front of the camera and microphone that morning. hensarling like the idea of a nation built around markets at least in the abstract. a seasoned legislator treated market profits advice to gain tangible legislative goals emulating graham. hensarling did not speak -- seek to eliminate financial rule but to write them in a way that paid
small and regional banks and credit unions. hensarling started to rain and the federal reserve bank supervision authority with an open question hensarling told this aei audience the federal reserve are to have a role in regulation. during the years between the 1930s and 1970s representatives have denounced federal reserve policies as part of passionate commitment to protecting the markets of small-town bankers. market talk was about practical politics during the long run-up to graham -- gramm-leach-bliley market talk among bankers was never about eliminating government but about creating a legal and politically safe supermarket bank offering new financial products. those big banks would take their place alongside the tennessee valley authority the interstate highway program the g.i. bill
and the space program as government programs that lost the technological innovation and added directly to productivity increases more jobs and wage growth. programs like interstate construction were large expensive and difficult to bring into being but the economic payoffs were fast. politics promised away out of expensive and exhausting government projects. politics consisted of an effort by members of competing coalitions to use the federal government's unseen automatic task for rising or 30. knowing your workers who would have to supervise its growth and no group of aircraft would make determinations but interest rates and critics like graham and hensarling described as the
political allocation of loans as france's the community reinvestment act. change the bank was promised a political economy that would eliminate the need for political economy. market talk blinded participants to one of the reasons they rarely succeeded in changing that rule. sovereign markets were fair and rational in allocating resources or so ran the reasoning. american institutions were not toga managed by economists or by market talk. exactly who would prosper and business models lifestyle regions ought patients and hard-earned prestige made to falter was one of the perennial questions about its way of promulgating the next of the bank rules in the prosperity that followed. the markets that government made including tankers markets governed american life in ways large and small but also in
unseen ways. that lack of visibility contributed to the idea that markets rather than government matter. thank politics was an exercise in economic acceleration in private firms rather than another federal department program. was an idea around which bankers like sandy weil and yuma cole and presence as differing as lyndon johnson bill clinton and donald trump could rally and perhaps activity slowed in the 1970s and the partisan divide widened in the 1980s bank politics remained among the handful of various or presidents comptrollers and bankers stood a running chance at fostering prosperity. not everyone is signed on to the half-century long experimenting government guided asperity to the financial year. paul volcker was not present at the aei that morning for
hensarling's remarks. poker said maybe was just as well he chose not to attend. in december 2009 congress approved the dodd-frank act and volcker spoke to economists the national executives and lawmakers including british prime minister and treasury secretary geithner. this distinguished group gathered for the wall street future finance initiative held that the united kingdom. the commercial bank remained at the center of the american economy. reminded the audience members otherwise poker just financial innovation like the insurance that aig provided for asset backed securities have wrought us right to the brink of a disaster. contrast bulk for showed this down as audience members the most -- is the automatic teller
machine. historians myself included urge our students and fellow citizens to avoid speculation about paths not taken. poker's admonition reminds us about the choices about regarding the organization of markets that bankers and adderall officials made. thank you for your attention. i look forward to comments and then to your questions. thank you very much. [applause] >> i got the wrong chair. >> that's okay i would have switched with you. thank you mark.
today we are honored to have two experts in banking and politics, banking history and politics. speaking first with the richard henry coffman professor of financial institutions and markets a deacon new york university school of business. his research which is expensive is focused on the history of money banking and finance and he's the author of many well-known books including at the history of interest rates. his writings appear in numerous scholarly journals and the president of the economic history association and the business history conference for which he is chairman of the museum of american finance in new york city. >> thank you. ..
and they talk about the economy of it but you don't see much data. the other thing that is missing, is a problem that i think that a lot of american historians have, they just look at the united states. so i think is the international dimension of changes and baking and you will not learn a lot about that in his book. so those are the two things i wanted to talk about the time available to me. here is some data, the number of banks in total assets of banks in the united states from roughly a hundred years ago, 2019 now, the peak number of banks was in 1921, i studied 200 years of american banking history and from three banks in 1790, both of which been created in the previous decade, one in new york and one in boston called the massachusetts plan,
and one in philadelphia called the bank of north america, there were three in 1790. and by 1921, we had in this country, 30000 plus banks. it must've been like a starbucks, today you are not very far from a starbucks usually. of course the assets were in billions and there's been a lot of inflation since then. so the affect and to assess will not mean very much. but then since the 1920s, it actually reduce the number quite a bit. from 30000 to 25000, but nobody really thought, that's a lot of banks to lose, 5000 banks is about what we have now and that's how many we lost in the 1920s. what happened that day entered decade is a lot of banks especially in the agriculture areas of the country the retaining banks and despite the
prosperity of the 20s, it wasn't so prosperous for farmers, and the farmers did not pay the backs of the banks disappeared. that was a change, a drop in the number of banks. so it is not the first time. in the drop in the number of banks that happen in the. in the last six or seven decades that mark talked about, that was nothing new in american history. an interesting thing happened. the depression of course and a lot of us are familiar that so we don't have to talk about what happened from the 1929 to 1933. the interesting thing from 1933 to 1980 to return to any change in the number banks. that was a heavily regulated system part of the financial reforms banking, pretty much the
same and that is a pretty long . . . almost nearly half a century over the any change in the number banks. that is when alex and i would tell you, alex read about this recently, basically it was a new deal cartel. the shocking number of bank failures led people in the 1933 to say we don't ever want banks to fail again. let's just not have very many banks and not much banking competition. interest rate were regulated an entry into banking was regulated, it was to keep the banking safe. much of my life was spent in that. and there wasn't been a began to say that the number banks had change for 30 or 40 years. and when i looked into it i discovered the entry was controlled and the idea was not to let banks fail, 363 banking
people in the crowd of part of the holiday, the binky was so safe and overly regulated than the 363 banking, he blurted 3%, you lent the money at 6% and you're out on the golf course at 3:00 p.m. to round of golf. that's called 363 baking, that's what we had for 47 years. of course, the big drop in baking since 1980, 1980 wasn't so different from 1933, but now we have a big drop to 4800 banks, or if you count the savings and loans you can get it to over 5000, that is what mark's book is about, but you will not find numbers like that in his book. he is explaining, the concentration worrisome people, paul said i was a hindered call
center, henry worries a lot, he's a good friend of mine and he reads a lot about the concentration in american banking. you see the numbers in 2018, the months that have assets greater than 250 billion have total assets of 8.8 trillion in the next hundred and 15 largest banks have 210 to 250 billion, the 4.5 trillion. if you look at the total assets of the previous site i will tell you, i will go backwards. the total assets were 16.5 trillion the 24 banks have those assets. we live in a very concentrated banking system compared to what we once were. in the last bullet point the fda
see talks about the 5000 community banks and savings institutions, the 2.2 trillion they are all smaller than j.p. morgan chase. all of the 5000 community banks. the very huge concentrating banking system. you won't see a lot of the numbers in march because he is doing with the politics of banking more than the structural data. my last lie, his financial globalization. there's not a lot about financial globalization but i think it was fairly important and will happen. u.s. banks expanded overseas a
lot in the 1960s and 1970s, they expanded overseas, commercial banks and the investment banks followed them. and when they went overseas they discovered that banks and other countries have different baking model in particular, when they went into the continent of europe they discovered a universal banking model. deutsche bank sometimes in the headlines today was considered a model bank in those days and they could do all types of things that other banks can do. they were universal banking but the universal banking model of europe was where banks have a lot of freedom to do the things that american banks gained and when they're competing with deutsche bank demand gotten the idea that we could relax her
banking rules a little bit more in america. another point about that is the financial department stores. we have a lot of programs in the united states of universal banking. in my callings when in eliza and come up with the notion that they should. i think abcd would finance some of the research. but they began to lobby and then eventually, there is always an argument, i don't think there's anything sinister, mark doesn't make it seem sinister about the concentration that is happened. there was an argument for what happened and that said american banks, because of her banking history where they cannot do
things where other countries, he could bank nationwide in america. i was surprised when i started studying baking history that in the 1960s you had to bank within one state, if you are lucky you could bank within a state like north carolina in california, he could've statewide pink branching, but in many states you are restricted to the city he relocated and or the city and the surrounding area, in new york city they were the biggest banks in the country. the only bank in new york city and maybe the surrounding counties. and then in my home state of illinois they were really enlightened what they meant was american corporations, those
very committed follower in minnesota and sell over the country, general motors commit cars in detroit but seldom all over the country. but the big banks cannot do that. but american corporations especially ones overseas were saying were gonna have to deal deutsche bank because his american banks cannot do all the things that joy shaving can do for us. so a little bit of the international story might've come in to explain why we got the banking system we did. i will turn it over to alex. >> our next discussion is formally my colleague at aei from 200-42-2015, and before that, he was the president and ceo of federal home loan mortgage of chicago from 1991 to 2004. alex works on a lot of financial issues.
business cycles, risk and uncertainty, housing finance, banking systems, and the interaction of all of these things with politics. he is author of several books and testimonies, shorter articles and opinion pieces, i'm sure you've run across pieces by him in various financial publications. he is a graduate of williams college in the university of chicago and princeton. alex the forager. >> thank you very much, it's delightful to be here. as somebody who is spent five decades, either working in or thinking about the banking trade. and though i am not a friend of the dodd frank act, i am a fan of markets, i really enjoyed reading this book. it makes one consider the baking trends over long periods of time which are quite intriguing i think. the debated issues of pasties which we cannot hardly remember how hard they were debated in
present a lot of personalities from the very beginning of my own days as an international department training in international expansion of the american banks. dick i've always found it more interesting. and indeed the constant interaction with governments and therefore between banks and politics, exactly what marx writes about in an interesting as this is going on government use bank purposes banks simultaneously used governments for their purposes and will succeed. to some extent. although both find themselves
think ambulance. in other words, think it is always political finance, they use the term political economy but i think of it as political finance, when british observer has written, the government and making her so immense that is difficult to see clearly where the private sector begin the imprint of a state of authority ends. market rules are booked, demonstrates his observation in the u.s. since the 1960s. but i believe the observation is also true in dick mentioned in an international presentation. as a profitable deal between king william's government and
the enterprising bankers who provoked the idea in england. in general, as banking scholar charlie tells us, every banking system at any time and everywhere is the product of a deal between the politicians and the bankers which they call the game of bank bargains. margaret shows us his game in action going on and on in this country since the 1960s. and just imagine in fact the game is going on all around the world and all different countries at the same time. now as dick pointed out the decade before the book's history begins the u.s. government and big bargain created a baking system design purposely to suppress competition and protect
existing banks from competition from each other and from other financial companies. as arthur burns riding in 1988 explained about the 1950s regime both the legislation suppress competition not only among banks but between banks and other financial institutions. unquote, this was in numerous ways including as burns wrote, they could offer interest on times but the amount that they could pay was limited by regulation known as ray q. market rules tells us a lot about the debates over rig cute. which meant the government fixing prices on deposits. today this regulation generated views the book tells us which are passionate in the regulation was considered vital.
passionate and vital, and now i thought of having a quiz for the audience about who knew what regulation q was and i decided to vote was breakdown one 100% accuracy by age. [laughter] >> how old do you have to be? >> fairly old. in short, is a book story begins as he told us, the everett country government had restricted in the design was to promote safety by effectively having a banking cartel from by the government as cartel manager. this made the begin system safe but sluggish.
the banks of the 1950s interesting enough own more treasury bonds than they had total loans. those of us in the tree today in the heart imagine but so was. the dismantling of this old-style simpler cartel and its replacement with the government banking system structure significantly more complex and quite a bit different is the story of the book. over the decades as market rules relate there were notable personalities involved, a few examples are worth mentioning, in the 1960s there was comptroller of the currency james saxon a crusader and he appeals to me as a character in the story, the 1970s and 80s there's the most innovative thinker of his day who renamed
the first national city bank of new york as citibank for better marketing he also led the charge into the sovereign debt disaster in the 1980s. also in the book in the 1980s and 90s for whom the national bank of north carolina became the nationsbank and that became the bank of america as it is now and it made charlotte, north carolina a banking center on the national basis. that is something that would've seen highly little unlikely when i was a training and bi bank. the secretary-treasurer of the united states in a top-level executive at citibank as it's faltered and would and been left on its own have crashed.
>> largely missing in a key part of the story are fannie mae and freddie. it would have been a stronger story to include the hyper political and huge financial role of these two so-called government-sponsored enterprises not only their role with their size and it wants us to think about numbers, danny is bigger than j.p. morgan chase, the biggest bank in the u.s. and freddie is bigger than citigroup. dick wanted numbers. urine economist, i'm a financial types of uses like, this lets us see the number of commercial banks from the 1950s to now. we see is a line go sideways until the 1980s.
>> i don't think there's much doubt that the shape of the sign will continue on down to the southeast in these numbers will fall but i will say that the 65% reduction in the number of things but 4700 is still a lot of banks while this was going on something else really important happen which is the banks became much more concentrated in real estate and real estate risk in his thinking gets more and more focused on real estate becomes even more political for the political finance to be
considered the commercial banks by and large cannot today more collectively be called real estate banks and that's a huge and important story in and of itself. we talked about how the 1950s was safe, the early 28 banking failures in the decade this is a history, the number of the banking failures in the united states by decade, it's a pretty interesting story, what you see is a huge exhilaration and risking into the 70s, the period of book is discussing into the 80s, everybody probably remembers the thousand or so colognes failed in the 1980s but on top of the more than a thousand commercial banks also feel and it was utterly disastrous decade for the banks
and we saw the same decade. failures relative to the old days of the 1950s have stayed quite high and succeeding decades. here is a question, what is the optimal number of failures. what is the optimal mix of bank risk versus innovation versus the growth we want on risk-taking, the answer is nobody knows. and so the banking bargains go on. these are my last slides. congress altering this. a little bit before the book and then during the period of the book has been visibly legislating away proving that banking politics is always very active. here is the banking legislation of the 1950s and 70s.
paul mentioned that in 1956, there is the interest rate of 1966 where congress itself got into price-fixing of deposits and now here's the decade of the 70s, a lot of legislation and here's the decade of the 80s, another branch of legislation, i will quickly point out the federal deposit insurance corporation improvement act of 1991 which proclaimed that it would by instituting corrective action and the bank failures and bank crises, there would not be anymore, maybe a good theory but it did not work. banking legislation in the 2000's, a lot of emergency legislation including some things we imagine and more recently in the last decade there is more banking
legislation, so quickly the looking through the list to underlines this theme which pops are clearly out of the book that there is constant banking politics either action, dealmaking trying to use both sides of the deal for the advantage of both sides and if it looks mutually montaigne as you can make a deal. and consistently with market rules, looking at the list of acts, just imagine the aggregate amount of lobbying and speechifying. >> campaign fundraising. >> a good place to be for the banking committees. and dealmaking that went into
creating the list that we have just reviewed and thanks mark for getting us to think of all these interesting things. >> thank you for both of you. now known as a moderator, it's my turn. thank you, very much for your commentary. when i read the book and i read it all before the snowstorm, so it's a little in the spiderwebs a little bit, my recollection is, and you mentioned tonight, these presidents since the kennedy years were under the impression that unleashing modernizing the banking system was a ticket for growth, without taxation without anything else that unleashing the powers of the banking system would produce prosperity and you detail all the way through and it wasn't
just republicans, it was democrats who thought that, bankers who play the game and went along with it, but there is also an overriding sense in your book the notion that markets are what create prosperity, maybe that's not really the case, maybe we shouldn't leave that. you believe these presidents were wrong or do you believe -- that is missing in the book, were they successful? they were successful -- >> absolutely. >> to taking them in some measure the growth that they thought would be unleashed? >> i don't know because as dick points out, i am not able to run the series of numbers. what i tried to do was argue
that these presidents from kennedy right through president trump sought to organize banking in a way to foster prosperity. >> i think you make the case well. i think the part that you come away with a little bit laughing in the end, what we think about that, do the work or not work. we have a financial crisis in the end and dodd frank, somebody's trend overturning, what is the financial crisis does not demonstrate that it ended badly,. >> it doesn't seem that way. it is not demonstrate that it ended badly. the origins of the banking crisis are so complex it resided all the way back in the underestimation of the risk inheritance and subprime banking, the fractured
regulatory system so just to come back to some of the things the commentators were saying, if you think about bank of america and say one of the large banks in chicago, there would be two separate groups of federal reserves regulators and the largest one sitting in the bank but they wouldn't necessarily have to communicate with one another. similarly there were different members of the office of the comptroller and currency. but they wouldn't have to interact with one another. so you have a fractured regulatory system in underestimation of the risk inherited subprime banking than the repo system. >> we don't have enough time for that. >> okay. >> i tell you a story about j.p. morgan will case in the fracture
and maybe i will the end, we come back, dick, you have a whole history of economic growth in banking and financial sector innovation, do you have any sense, to me it was market forces that were pushing the banking system to consolidate and it was political forces that were keeping them from happening and all the legislation along the way is a grand bargain for different coalitions to get the most or control their condition along the way. to me in the market forces are pushing where we ended up in the politics isn't making it happen in various steps. >> on the big question, did it
really work, was that a prosperous period for the country? i think the answer is obviously yes, if you look at whether banking costs are not, i would say talking about commercials bank and savings bank, but you have to look at the whole financial system, but the. , i was privileged to live and born in 1940 and six decades of the 20th century were about the growth of. capita income, it's about as good as it gets, you look over 230 or 40 years of american history, those were the best in american history exhibit blame the best since 2000. we all remember parts of it. but the story is after world war ii the united states did not have a lot of competition because the ally with a i in and many were smashed up and took a couple of decades for the rest of the world to get back on its
feet after world war ii. our businesses had what everybody else wanted enough. in our banking system was carless. starting in legislation, the commercial bengal bankers gradut free but one of the problems was wall street was cutting into the market share finance and so we did not talk much about this but it's an amazing thing, you should compare the valu balancet of the other wall street firms back in the 1970s from what they are today. they were small partnerships and they all became corporations and expanded greatly. that is a part of the story that you have to look at the whole banking system, not just commercial begin. i think you're right, the bankers wanted the freedom to do more in the political system was very slow to catch up with them and commercial banks in particular were regulated that's why wall street took away the
market share and of course they said look what's happening, wall street is taking over. >> another point, and then will turn to the audience with questions. during the 1980s and into the 1990s there was kind of, and my recollection working at the federal reserve in the late '80s an early '90s, there was a sub competition going on between federal reserve holding companies and occ banks, and while they were still in effect there is a section 20 part of the act that allowed banks to do some underwriting of securities in the he allowed to expand quite a lot. but by the mid- '90s we really had investing they clea bankingd bank holding companies and the national banks wanted a piece of
and i think you might've covered that a little bit, but the laws were forced essentially at some point to catch up with her. at some level the federal reserve to the back door was pushing a liberalization that finally got cauterized in 1999 and i am not sure i picked up on that totally. >> i thought i covered that, not as particularly as you just did especially your superior knowledge of section 20 but i disagree with some of what you're saying here about banks catching up, the laws catching up with market. the ability to discern the judgment is difficult. thinkers disagreed right to the early 1999 that especially the
smaller bankers and the insurance companies and before that the securities. >> that is covered well but the forces to reunite investment banking and commercial banking were taking place from the late '80s all the way up and that was happening without legislation and it was in a sense pushing politicians to the number of notable. >> it took place through regulators and it comes across in many points of your books. their unelected regulators are so important in interpreting the laws and allowing financial innovation for the congress gets issues that may or may not address. >> encouraging and directing.
>> absolutely. with that, when we turn over to the audience intake q&a. why don't i start here and go hear from. please tell us your name and then ask your question and keep it short if you could. >> my name is mark with mathematical finance company and i work with the american academy that does risk calibration. in this group has started a project to get the calibration data for banking insurance risk models made public on a regular basis, not just in u.s. but other countries. we have talked more about the analysis, my impression is we will have the most trouble getting the banks to cooperate. >> what your question? >> you talked about the politics, what do you think about the politics of getting
the calibration data for bank insurance and risk models made public? >> it sounds a great idea but who's going to resist it and how do we get this topic? >> it sounds like a her project to me politically. one of my favorite lines in the book is how all of the banks and the savings banks thought the most horrifying prospect as the 1990s when along was that an insurance company might own a savings in alone and that would really be awful. as i read it and imagine minors account with state farm bank, and state farm insurance company on the savings it would be horrible sound so horrible i treatment account very well.
so i think the industry a politics of what you're talking about sounds hard to me. but i wish you good luck. >> thank you. just a quick observation. i hadn't heard any discussion about electronic technology on how it is affec affected the bag industry does the bucket into that? it would seem that that would be a significant factor. but here's my question, we have seen the evolution of thinking over several decades. where we are today, what you do about it? is there any for significant change in the legislation or regulation of banks? how is this supposed to evolve from her rear today? >> is a great question.
yes i talk about computers in the sense for example, walter purchased a computer and then leased them to companies who needed computer space. so the question was, did that constitute a legally made loan for regulated commercial bank. that's all in the purview of regulation and legislation. ultimately it was answered yes that they can do that, i don't have an answer about what we need in the future. and as these gentlemen will point out, we have a heck of a lot of bank legislation after and i use the book as an looseness of it all. and never stops. >> so the answer is, as long as we have banks and politicians will have more legislation. [laughter]
>> well said. >> as long as we are run by human beings there'll be more politics and legislation, but the key, will on average economic growth continue and it will continue on average if there's more innovation. there is risk-taking, there is competition and there is the rule of law but at the same time that is on average in every now and then since these are all the government agencies, the bank themselves, not to mention all of the rest of society are composed of human beings with their hypocrisy, fears, self-delusion as well as the good ideas in their driving their energy. from time to time we will have crashes and methods but the question is on average do we keep going up in my answer to that is yes. >> i think if i weigh in, the
technology is subject to economy as a scale. the bigger banks can afford the technology more and probably benefit more from a and that will continue, so i think it's an important point your reason. and to me it suggests that the future, even though we seen the banks fall from 30098 years ago to 5000 now you're probably going to have even smaller numbers, the trend is for the number to get smaller, what is going on now, i used to think the number of banks is going down the number of branches is going up. but today the number of branches is actually going down as well and that is because i paid a few bills this morning before he got on a plane to come down hear from snowy new hampshire, and i didn't have to go to the bank.
>> we can have a computer in her pocket now that do all kinds of things first. if you just push the electronic idea we all know that one of the questions is, how parking artificial intelligence go. so i would like to propose, suppose it really is true intelligence embedded in electronic machines, will the intelligence do better at avoiding mistakes and politics and periodic crashes and natural human intelligence, no it will not. it is an inherent to the problem of intelligence which is the ability of the future and what we are struggling to his dealing with the uncertainty and mobility whether it's machines
or people and also because of the we will keep having political attempts to make the uncertain more certain that they will never succeed and therefore as marxist this game will go on forever. >> next question, how about back there and then will. >> hello mike, i graduated from college of super regionals and atms popping up, but i was at a conference last week and they're talking about startups and things like that in terms of technology startups they seem to be popping up in the same places with the super regionals suddenly spring up, charlotte, atlanta, nashville and i'm wondering is everything outside of the banking finance committee that causes that kind of thing to happen? >> community banking rising?
[inaudible] >> i've written a little bit about syntax, it is my impression that some people think them is a big competitive challenge. my guess is that the bigger on ones, dirty doing i think, but they will inc. is in tech into their models and adult views in tech as a challenge to the current structure but the big banks as a part of the technology look will incorporate syntax into their models. >> is an interesting question, i decided not to take up is in tech, i was becoming aware of their development as i was completing the book and i did not want to push on into a new area but it should not be surprising to any of us that the city's in which these. the larger or prosperous cities
that are drawing in recent college graduates, people with ma degrees, major universities. >> over here please. >> gerald chandler, it seems to me you are talking about things and you did not include savings and loans and credit unions and even a chance. so when we have this chart, what happened to banks, it would be more inclusive to me to it say what was the total of banks, savings loans and credit unions and so on. >> the question is in my right you did not include them? >> they were not in our numbers, 1950s the sum of savings and loan's and banks were something over 19000 institutions that some is now down to 5400 or so. so the decline is even steeper
if you include the student entered savings banks. >> the fundamental question underlined in the book, around 1960s they were savings and loan's, investment banks, commercial banks, small insurance brokerage office, by the late 1990s there were supermarket banks. the question was, how did that transformation take place, but no i did not specify the number of savings and loans, probably should've. >> and credit unions. >> similar credit unions and similar reduction, they were all a large number of credit unions. if you out altogether with half of the population of today had six or eight times as many financial institutions so that we see on a. capita basis is huge.
but in some there are bigger, sum total of banking assets relative to gdp, the assize of the economy is bigger than it was even though the number of institutions of smaller,. >> thank you. i will take advantage of the remarkable historical perspective that you will have and anyone who wants to answer this question, take it. the british tv character who brought the time traveling machine to the use of mankind has made available to you and you can go back to 2002 within an appointment as a federal reserve chairman and you really respected. what is the one thing that you would do to prevent the 2008 great recession. [laughter] that assumes the federal reserve can do that. >> one of the major mistakes
they made early on was in not recognizing special purpose entities the theological apology. the regulators debated and they never settled it and they forgot about it. all those assets that were highly risky and blew up many of them ended up situated ends special purpose entities which were hundreds of them, nobody was looking what was in the, they should even, that was one of the single biggest mistakes, nobody saw the problems that we are building or worried about it, it wasn't like we didn't see earlier back in the late 1999 and the finance company indust industry, a number of finance companies had made a lot of
loans on manufacture housing, which is a fancy name for mobile homes. there is a particular outfit and they package the way that they funded themselves. the package up the mobile home loans into structured bonds and pulled them off to the market. and when that bubble blew up and blew up because of the time in 1999 they had nobody to sell the equity loss piece, the riskiest piece because the capital balance sheet and they value them very highly in an auditor when in and basically brought them to troost and had to write down their equity piece. they were bankrupt in the home market fell apart, it was not part of the banking system and regulators did not learn anything from it. a few years later in not have the same problems
off-balance-sheet, repose, repose 360 where they did the repurchase agreements that were under the wire so they had all kinds of fancy ways to raise money really risky without anybody knowing it, and ron blew up, but it wasn't the banking system, the banking regulators never learned their lesson. in those things ended up fighting them and causing the crisis. >> subprime auto, the same story in the same way. my answer would be different, don't drop interest rates if you're the fed, in 2003, 2004 in order to create a housing boom to also. >> that made it worse, and i would say paul is absolutely right but you consumer generally, which is look for high leverage based on
exaggerated prices of assets. that is what is the same of all those cases and it was the same about housing, so if you'd only been smart enough which are the anybody was, you would have tried to see what happens to highly leverage structures in the prices of the underlying assets drop dramatically. >> can you comment on that. >> one of the points that alex made was that banking is becoming like real estate big enough. like half of the lending in half of the loans are commercial, residential real estate loans. to me if that was not true especially in commercial banking 50 or 60 years ago, one of the things that you learn when you study banking history, i think
walter said it rules the english editor of the economist, and banks should be lenders and so on. he said if you want to be a banker you need to know one important thing, the difference between a promissory note and a mortgage. your business deals with the former. and so a classical banking theory says that commercial banks should not be involved in real estate. alex says they are heavily involved in real estate now. in colonial america they had lamb banks and we rejected the idea because they had the same trouble, what happens when the property values fall. we got into trouble in 2002 or three that you are talking about because on wall street and the guys that were taking all the mortgages and packaging them and to mortgage-backed securities said we are perfectly safe because real estate prices never go down.
and so if we lend money to this guy who just swam the rio grande from mexico get the $400.000 house in the united states. anybody who knows any economic or financial history knows the real estate there have been bubbles forever. so i would say that maybe the danger in our system today is that were too much involved in the real estate. >> i think we will close in a second period one final thought, all my smart panelist and myself may have 202 2020 hindsight, you have to remember, if there are no losses the politics of the day is not going to let the regulator show anything down. the young lady who had her hand up her question. >> she can also last question. >> i just wrote a book called
hamilton versus wall street. what i wanted to raise, i have not unfortunately read the book but i know of the time of dodd frank coming through there was also a move to reinstate last year, there is legislation in the senate, maria cantwell et cetera and following that there is legislation in the house for the next several years that god will over 100 supporters. in the argument that was made was particular. when god's deals are there is a golden age of productivity in the united states, the 32 the 50. which you referenced was a period where economists indicate
productivity was at its height. now i wonder how you would reflect on that. >> let me take up to question. >> we only have a second seal to be really quick. >> that legislation within the house and senate was not backed by the ministration, they were interested as i a in the book and promoting and perpetuating the supermarket banks. they were not interested in bringing fakes apart in the economic disruption the judge would follow. >> that will have to be the last work, rather time. i like to think by author and distinguished panel host for the commentary. thank you very much. [cats meowing] [inaudible conversations] you can chat with him and he'll be available.