How Are Community Bankers Helped by Consumer Rip-Offs Run by the Largest Banks?

The continuing ability of Big Finance to play our elected representatives, and thus the taxpayer, should surprise no one. This is about organized money against relative diffuse public interests. It’s Mancur Olson’s Logic of Collective Action meets sophisticated media managers with experience in emerging market crises – they know that as long as you can look confident and pump in money, everything turns around and people forget (and then you can re-run the show).

More puzzling is the reluctance of other well-organized interest groups to act against Big Finance. In particular, powerful business groups – like Independent Community Bankers of America – understand very well what happened and the way in which are largest banks were responsible. Yet they refuse to push for regulatory reform, either in broad terms or with regard to consumer protection (e.g., see their policy statements; recent testimony).

Their reasoning is fascinating but completely wrong.

Community bankers have convinced themselves that any new regulatory burden will fall disproportionately on themselves. They are particularly concerned about the consequences of a Consumer Financial Protection Agency (CFPA).

But complexity, disinformation, and ill-treatment of consumers are absolutely not in the interest of community bankers. They mostly engage in simple transparent transactions – the kind that the CFPA would wave through.

How are community bankers helped by consumer rip-offs run by the largest banks? Those schemes undermine consumer purchasing power, destroy confidence, and lead to periodic crises – macroeconomic, regional, and personal. The big banks may renounce such behavior for the future, but anyone in the industry knows that their incentives are quite to the contrary.

But there’s more. The fall-off in consumer spending affects commercial real estate, particularly through its impact on retail space. Community bankers have a major exposure to this sector. This may seem like an indirect mechanism, but the banks know very well what is happening and why.

And that’s not all. The increase in government debt today, taken on as a crisis-fighting measure, means higher taxes for someone tomorrow. Community bankers earn decent incomes and should start putting some of that aside to pay for the misbehavior of big bad banks down the road.

Protecting consumers properly is essential to sustained recovery. It won’t by itself necessarily prevent future crises, but it can limit their impact and their costs. It also tilts the playing field – for once – away from the biggest financial players and towards some of our smaller and better run banks and credit unions.