Tuesday, October 23, 2012

Inside the Mindset of a Free Market Destroying Government Regulator

In her book, Bull by the Horns, former FDIC chairman, Sheila Bair, recounts her thinking when Walmart was seeking to get a bank charter:
Another major issue that divided the [FDIC] board was the question of whether Walmart should be approved for a bank charter and deposit insurance. The general rule--somewhat unique to the United States--is that nonfinancial commercial entities such as Walmart cannot own banks. However, there was an arcane exception to this overarching separation of banking ans commerce for banks chartered in Utah. Specialty banks, known as "industrial loan charters" (ILCs), has been used in the past primarily by car manufacturers and other companies that wanted to create banks to make loans for their customers to buy their products. Now Walmart wanted to use it to set up its own bank.
Community banks feared that Walmart would use its bank charter to open full-service banking branches in its thousands of stores, undercutting small local banks that do not have the same deep pockets and economies of scale. Walmart insisted that it wanted the charter only to perform narrow services such as processing credit card payments. My internal directors were uncomfortable with the Walmart application, as was John Reich, who had deep ties to the community banks. John Dugan, on the other hand, was somewhat sympathetic, not surprising given the fact that he had once worked for Senator Gran, the Utah Republican who had championed the Utah exception.

I wasn't sure where I came out on the policy issues associated with Walmart having a bank. On the one hand, with Walmart's huge imprint, I could see that its entry into the banking business could theoretically expand banking services into lower-income communities, On the other hand, the impact on community banks could be severe...Like Hamlet, I couldn't make a decision. So I punted. I asked and got approval from the board to place a moratorium on all ILC applications to give Congress some time and incentive to think about whether it wanted to put some limits on who could have an ILC charter.
There are many points that deserve comment here, beyond the entire question of whether there should be an FDIC in the first place.

Point one that should be noticed has to be the fact that Walmart likely found this loophole because of its assemblage of high-priced lawyers looking for such loopholes. What chance would a small town successful, respected businessman have of finding such a loophole, if he wanted to start a bank? It's why the rich are getting richer in the United States and the rest are falling behind. The rich can afford to hire the legal talent to get around obstructive regulations.

Of further note is Bair's entire thinking on whether Walmart should be granted a charter. She raises the concern that it might hurt community banks. So what? The free market system is all about competition with those providing the best service surviving. Bair's thinking here is an example of one reason why government slows down the advancement of an economy. She is thinking entirely from a political perspective, rather than allowing the free market to evolve in a manner so that the best providers survive.

Bottom line: In her role as a bank czar, she is used the regulatory apparatus to prevent the free market system from working and, instead, suffocated it, as do all other government regulators.


  1. This whole excerpt is so rife with moral hazard it's unbelievable.

    It also shows how big the bureacratic egos get...at least she pauses for a moment to reflect that she might not know what's best for the nation.

    Clearly in the big picture though she lacks a moral compass:

    "I could see that its entry into the banking business could theoretically expand banking services into lower-income communities, On the other hand, the impact on community banks could be severe"


    "I could see this might help poor people, but I said "fuck it", the small banks with wealthy owners have to be protected."

    I hate her already after having read just one excerpt.

  2. Harry Teasley's Rules of Bureaucratic Behaviour:

    Rule #1: Maintain the problem at all costs! The problem is the basis of power, perks, privileges, and security.

    Rule #5: Maximize public-relations exposure by creating a cover story that appeals to the universal need to help people.

  3. The other issue is that Walmart found a legal avenue through which it could charter a bank, but the FDIC decided to not grant the application despite having no basis at law to do so.

    This is the problem with totalitarianism. Latin America has experienced this problem for a long time, where bureaucrats don't care what the law says. It is now here in the US. This was inevitable of course, given what Hoppe has taught us about the State and Democracy.

  4. She is too stupid to even realize it....
    Or is she just another political terrorist "getting off" at harming everyone else?

  5. A consequence of our UnFree Market is that companies like Wal Mart use their size and power to gain a competitive edge via legislation, eminent domain, asymmetric tax breaks, etc.

    I don't like Bair, but I think she made a decision that will be better in the long run.

    Would you want a Bank of Wal Mart that had the power of the Federal Reserve behind it?