Bankruptcy

The War on Bank Profits?

By Adam Levitin

The Wall Street Journal had a peculiar opinion piece today about bank regulation.  I won't pick the low-hanging fruit of its bizarre statements about potential CFPB Director nominees, but I think it's noteworthy for the revealing language it uses.  It says that Washington should "call off the war on bank profits" and allow[] banks to make profits."  

The conceit of the piece is that a subset of businesses have an entitlement to be profitable.  That's deeply inconsistent with a belief in markets.  The fundamental rule of American capitalism is "Go Forth and Profit, but Fairly."  It's one thing to debate what sort of practice is fair or not.  But that's not what the WSJ piece argues.  It argues that legislation like the Credit CARD Act and the Consumer Financial Protection Act are wrong because the restrict banks' profitability.  This is a serious misunderstanding of financial services reform, and if this is how the financial services industry as a whole understands regulatory reform, we've got serious problems as a society.

The reform legislation is aimed at reining in bad practices in financial services. To be sure, the only reason to engage in those practices is because they are profitable.  But the goal isn't to wage "war on bank profits."  We need solvent banks, and to be solvent, and bank needs to be profitable.  Profitability, however, must be found without the bounds of fairness.  Theft is profitable if it isn't illegal; clearly profitability über alles can't be right.  It proves too much.

It's hard to say how representative the thinking in the WSJ piece is.  But anyone who subscribes to the view that financial services reform is about sticking it to the banks doesn't get it.  The reform agenda isn't class warfare, and it isn't trying to rain on anybody's parade.  It's about ensuring that markets operate fairly and safely.  

I'm hopeful that piece isn't representative of the thinking in the financial services industry; it might just be the Journal's ideological chest-thumping, throwing out some red meat to the true believers.  But if it is representative, then we've got a real problem--namely an industry that doesn't realize that some of its practices overstepped the bounds of fair play.  Combine such a lack of self-awareness with a profit motive, and we'll be back at square one before you know it.  

Full post as published by Credit Slips on September 10, 2010 (boomark / email).