Senator Elizabeth Warren (D-Mass.) has made quite a name for herself early on in her first term in the Senate, by actively pursuing an initiative to revamp and reintroduce the late Glass-Steagall Act. Her intention is to fragment the nation’s banks so as to ensure each of the banks’ departments will only have access to its own capital, thus moderating the effects that would ensue should one of those departments fail.
Yet despite her pro-regulatory crusade for big banks, Senator Warren has opted to champion local banks, hoping to exclude them from Basel III’s capital rules, which are targeted specifically at Wall Street’s biggest firms. And Senator Warren is right to do so — the last thing banks need, especially local ones that have naturally less liquidity, are more restrictions. She is ironically, however, undermining her own ideological credibility by doing this.
By arguing that large banks require stealthy regulations because they are fundamentally less responsible than small banks, Senator Warren is indirectly providing the framework for an argument that larger government is likewise irresponsible, and should thus be limited.
Deliberately clarifying her support for local banks while fortifying her skepticism of large, national banks, Senator Warren recently explained that "I became increasingly concerned about the business model of the largest financial institutions — too many of them built their profit model around tricking their customers. Community banks didn't do that. So right from the beginning I saw the key differences among their practices."
Her mistrust of massive, national institutions is understandable: They are driven by profits (as they ought to be) but are less engaged and invested in local interests than are community banks. Nevertheless, Senator Warren does not extend this suspicion to the federal government, as she ought to. Her campaign website is riddled with proposals to increase the federal government’s involvement in myriad sectors across the nation, an ironic stance given her belief that local intuitions better serve communities than do national ones.
If banks such as JP Morgan and Bank of America are too involved in too many initiatives to effectively serve local needs, then so too is the federal government. And at least large banks are incentivized by markets and competition. The federal government is indeed incentivized by constituents to provide services, but there is no opponent to force efficiency or prudence. Although incumbents face challengers, the unelected bureaucracies that actually administer government programs are not held accountable to high standards by the private sector and have the consequent prerogative to be wasteful and irresponsible.
If the nation’s largest banks face financial difficulties as they did in 2008, then they are subject to capitalism's natural penalties. When the federal government offered relief to some of these institutions with TARP funds, the beneficiaries were required to promptly reimburse the government with the added costs of interest. Yet when departments within the federal government face financial difficulties, there is neither a market to induce penalties nor federal regulators to demand reform.
There is obviously a debate to be had about the extent to which government ought to be involved in the business sector at both the national and local level, as well as the federal government’s own efficacy in providing services. Senator Warren cannot reasonably insinuate, however, that large financial institutions are reckless and locally inept while also proposing that the largest institution in the nation — the U.S. federal government — increase the depth and breadth of its local endeavors. It is simply contradictory in principle and in practice.