The Transformation of U.S. Banking and Finance: From Regulated Competition to Free-Market Receivership

Abstract

This article offers a critique of the deregulation of banking and finance that started with the breakdown of the Bretton Woods regime of fixed exchange rates during the Nixon administration, accelerated with interest rate deregulation during the Carter administration, and was deepened during the Reagan administration.

Deregulation is seen as a changing of paradigms, from the New Deal regulatory model that limited price competition and channeled credit to socially useful purposes. The monetary and fiscal implications are significant. The regulatory model, particularly in its heyday, served to limit the authority of the Federal Reserve, neutralized monetary policy, and invigorated other policy tools to maintain price stability, especially in monopolistic and oligopolistic markets. As a result, the elected branches of government were able to activate fiscal policy, thereby financing the World War Two effort, as well as the Cold War military buildup, the Marshall Plan to rebuild Western Europe and Japan, and the G.I. Bill of Rights to educate and house returning U.S. war veterans.

Particular emphasis is given to the distortions and inconsistencies in the deregulation model, including the resort to bailout of large financial institutions, such as U.S. commercial banks and savings and loans, as well as defaulting foreign nations. The irony of deregulation was that it led inevitably to a state of receivership and implicit subsidy for those with market and political power, while extracting rents from others.

The Article concludes by proposing a return to a model of regulated competition that would be suited to a financial environment that is increasingly globalized. Any restoration of national sovereignty over monetary and fiscal policy would require multilateral mechanisms, tax and market incentives to limit the volume of destructive speculative activity. Canova offers one of the first discussions in a law journal of the proposed Tobin Tax, named after the late Nobel laureate, Dr. James Tobin.

Keywords: Banking, Finance, Central Banking, Monetary Policy, Fiscal Policy, Incomes Policies, International Monetary Fund, World Bank, Regulation

JEL Classification: B20, E12, E40, E50, E60, F30, N20, P10, E42, F32