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Norbert Michel: To wrap things up, I’m going to start off doing something that I’m pretty sure nobody at the Cato Institute has ever done before. I’m going to show you a TV commercial that ran during the Super Bowl that’s about bank capital requirements. And it’s from Super Bowl LVIII, which was in 2024, and it was part of a longer campaign that banks ran against the Basel III endgame proposal, which sounds a lot like an Avengers movie, but was not. So let’s watch this clip really quickly.

[Video clip plays]

Video Clip: You see this? The Federal Reserve is considering new basil guidelines.

Video Clip: What? The Fed’s trying to tell me how to make my pizza?

Video Clip: Not basil, Basel. And no matter how you slice it, it’s bad for small business. If the Fed implements Basel III endgame, small businesses may not be able to access the capital that we need.

Video Clip: We’re squeezed enough already, and now they’re going to make it even harder for small businesses?

Video Clip: That’s really grating.

Norbert Michel: Okay. Other than the puns, I’m sure you’re probably sitting there thinking, “Yeah, the banks were against the regulations. That’s just truly shocking.” Well, it actually was shocking. It was shocking that they ran this campaign at all, because banks never do anything like this. They have a very, very complicated love-hate relationship with regulation. They frequently hate it, but they rarely pick a fight with their regulator. They hardly ever talk about it in public, and they never ask for deregulation. They pretty much accept that they’re going to be heavily regulated, and then they work with Congress and the agencies very quietly to make marginal improvements here and there, just so that they can live with a few things and smooth out some of the edges. It’s very complicated, especially for the big banks. In fact, right after Congress passed the Dodd-Frank Act in 2010, the law that ultimately led to this campaign, many of the big bank CEOs came right out and praised the Dodd-Frank Act, and praised regulation more broadly. One of the big bank CEOs even said, “Hey, this is great. Regulation puts a moat around our bank. It keeps out the competitors. Regulation is very costly and expensive and difficult for the smaller, nimbler competitors to deal with, so we’re good.” And waging a campaign against the regulators is pretty much the polar opposite of that, right? So that tells you just how bad that regulatory proposal must have been.

And that makes it very easy to say, “Well, let’s bash the Biden administration for coming out with these crazy rules,” right? Well, I would resist the temptation to do that, because it was only a matter of time before somebody in this crazy system that we have went too far. What I mean is, Congress has given the regulatory agencies an enormous amount of discretion to write the rules. So it was really only a matter of time before somebody with a somewhat controversial agenda came in and used that discretion. And that’s what happened here. Somebody did that. They went too far, and you saw the hate part of that love-hate relationship kind of bubble over.

To a lot of people, this relationship seems surprising and contradictory. But we’ve talked about many surprising, sort of contradictory things today, because there are so many things like that in our system. That probably could have been our conference theme. But Anne had a better idea, so we went with that one.

One of the biggest conflicts is inherent to our nation’s founding, though, and that’s that the United States is supposed to be all about freedom and free enterprise and free markets. And in many ways, it has been, but not at all when it comes to money and financial markets. That’s been the opposite. It’s why we started this morning with the Hamilton-Jefferson panel. Nothing exhibits the fundamental conflict in the US founding like that debate. It has many, many layers, including the basic question of whether the US would become a powerful industrial nation, sort of the Hamilton side, or it would be mostly based on farming, sort of the Jefferson side.

Now, I’m actually from Louisiana, which is the tip of the territory that Jefferson purchased when he was president, even though he was against a powerful executive branch. Nobody among the founders exhibits contradictions any better than Jefferson. The very first time that I ever set foot in Northern Virginia was a trip to Charlottesville that just happened to coincide with the 225th anniversary of America. So it’s like I’m having an anniversary today too. On that trip, I was able to visit Jefferson’s home, Monticello, on Fourth of July weekend. It was such a great trip that I moved here in less than a year. That part’s true. Since then, I’ve visited Monticello at least 10 times, and that’s also true. I went again just a few weeks ago, and I’m actually right now still kicking myself for not taking a selfie, because I really was there. I love going there, and I love all the contradictions and conflicts. They tell us a lot about human nature, and there’s all kinds of layers to that there. Things like Hamilton casting the tie-breaking vote for his hated political rival, Jefferson, to become president, and really only doing that because he hated Aaron Burr so much more. So many things have changed since that vote, but politics, those haven’t changed.

Something else that hasn’t changed is the way a lot of people view financial markets. We still have a great many Jeffersonian-style skeptics of finance. And Jefferson was pretty much on Team Freedom, radically so for his time, but not when it came to money and finance. That’s where we see a profound mistrust of money and finance, even though he borrowed a ton of money. It’s a lot like today. Right now, we have a populist president who made a fortune in New York real estate, but who just supported a bill to bash Wall Street for investing in too many homes. And if you read the text of what they’re saying, it’s very difficult to tell whether it’s coming from President Trump or Senator Elizabeth Warren or Bernie Sanders.

Now, here’s a little example from a Trump administration executive order that was titled “Stopping Wall Street from Competing with Main Street Home Buyers.” And it opens up with, “People live in homes, not corporations.” You know, just in case you were confused. And it goes on to talk about how important it is to stop Wall Street from treating your neighborhood like an evil trading floor. That’s a Trump administration executive order. That’s not a Bernie Sanders political rally. And just about six months after this order came out, the President signed a bill into law that was sponsored by Senator Warren. And when Senator Warren introduced it, her sales pitch was, “Homes should be for families, not for giant corporations.” These are the same political slogans, but they’re just that. They’re political slogans. They’re propaganda. Wall Street doesn’t compete with anybody for homes. That’s ludicrous. These slogans ignore how financial markets work, and they ignore how much financial markets help us. That’s not why they’re using them. These politicians are using those slogans because they want to play on people’s fears. And they know better. They know how markets work, especially someone who is from the real estate industry. So that’s bad enough, right? But they’re doing it to gain more power over what people do with their money. So that makes it that much worse.

Either way, the truth is that diverse financial markets, ones that help people buy and sell all kinds of different investments, even the supposedly crazy things like derivatives and asset-backed securities, that’s what helps people get the things that they need, things like homes. It helps people get capital to start a business or to run a business, even really small businesses. But many of these populist politicians won’t acknowledge that, and they even attack any kind of financial activity that doesn’t directly raise money to buy capital goods, physical capital goods. Personal retirement accounts, E‑Trade accounts, those kinds of things, they don’t even like those too much, because when people buy shares through those accounts, the money doesn’t go directly to those companies to buy things. And it’s true. Companies don’t raise money in those particular markets. That’s why populists say things like, “Markets just move money around.” But they’re missing the point, completely missing the point, because those trades in those E‑Trade accounts and those 401(k)s, they do fund capital goods indirectly, and it turns out that that indirect relationship is vital for capital investment. Why? Because when people can buy and sell all kinds of assets and investments to and from each other on a regular basis, it makes it that much easier for any company to sell their shares directly to investors, which is exactly what it means to make it easier to get money to make capital investment, to buy physical capital goods. Those E‑Trade accounts might look like they’re just moving paper around, but that’s not all they’re doing. They’re making it easier for everyone, pretty much anyone, to raise capital.

My dad was a combination mechanic/​electrician kinda guy. He fixed standby generators and engines and transfer switches. And for much of my life, he ran a small business. Nothing fancy, just a very small business. He knew very little about finance, and he really didn’t care to. He had me. No, no, I’m just kidding. I was too young. But he was able to rely on financial markets to raise capital because US financial markets are so well developed, despite whatever flaws we have. He was able to borrow money for trucks, for special equipment, for tools, and for working capital, even to do things like do oil changes on industrial engines. That became harder for him as time went on, but he still relied on those markets. And even though it’s not so easy to see, it is those well-diversified capital markets that make it easy for people like him who don’t have a lot of money and don’t need a lot of money to do that. It opens up more possibilities and opportunities for people like him.

Financial markets are not the enemy. They’re not. And the more we restrict people in those markets, the more we restrict what people can do with their money, the harder we make it for people like my dad to find a bank, to find investors, and to find opportunities. And once we start drawing arbitrary lines in the sand, saying things like, “That activity over there, that’s too risky,” or, “This particular activity over here isn’t productive enough,” that’s where things start breaking down, because there’s no way to do that objectively. That’s how we end up with a system that has too many decisions in the hands of too few people. It’s how we get a system that literally negates the benefits that markets provide. It’s how we get a system that’s too fragile and that leaves too many people dependent on those in power, which is the opposite of what we’re supposed to be representing here in the United States. We shouldn’t have a system like this, one that holds everyone hostage to some degree to the whims of just a few people, or in some cases, just one person, even if that person is the President of the United States or the Treasury Secretary of the United States, who just happens to think 350 homes is too many for any one investor. That kind of system makes lawyers and ex-officials very wealthy, but it makes it harder for everyone else to get the things that they need.

The whole thing is thick with irony too. A bunch of millionaires running around telling everybody else what it means to be too rich or what it means to invest in something that’s too risky. The best we can say about that is it’s not really very new. It’s a very, very well-worn phenomenon. We can go back to Jefferson. Supposedly, he hated the financiers, right? Well, he borrowed money every day and twice on Sunday just to fund his lifestyle. Monticello was not a profit-making enterprise. It was a money pit. And he loved books, and he loved Bordeaux. He tried to make that, and he couldn’t. Didn’t work that well. That’s a whole nother story. But he loved these things so much that he died in debt. Not a little bit of debt. In today’s dollars, it was about three million in debt, and he did that knowing that people enslaved on his land would probably have to be sold in order to pay off those debts. This is the man who, in 1774, publicly blamed the King of England for bringing slavery to the American colonies, and who declared that human rights were derived from the laws of nature and given by God to all people, and that trade with people from all parts of the world was a natural right. It’s one of the many contradictions of Jefferson’s life.

But we do still owe Jefferson a great deal. His radical philosophy that all men are created equal, that’s still the best starting point if you’re going to set up a government. His mistrust of money and finance, he kinda messed that up. Unfortunately, he wasn’t alone. There were many people in his time that viewed finance as some kind of mystical, unnatural evil force. It predated him by thousands of years. But it’s still with us today. Another good example from recent times is the Occupy Wall Street movement. Those guys supposedly hate Wall Street. Well, turns out they really like money. And they all had laptops and cell phones and used wireless communication, and the truth of the matter is, you don’t get those things in the hands of so many people so easily without Wall Street. So they should have tempered their hate just a touch and come up with a better slogan.

I come across a more subtle example of these kinds of contradictions all the time in the policy world. Many of the staunchest supporters of free markets, not just here in DC, just broadly in the free-market policy world, draw a line at financial markets. So these are people who have supposedly dedicated their lives to free markets, to fighting regulation, to fighting government intervention, but not when it comes to financial markets. That’s different for some reason. And the most common reason that I hear, their explanation, is that we have to regulate financial markets to keep people safe. To prevent a financial crisis. That sounds great, I admit that. The problem, of course, is that we know it doesn’t work. That’s what they’ve been doing for hundreds of years, and the whole period is littered with financial crisis after financial crisis. It just doesn’t work, because no matter how fancy and sophisticated we make all those rules, what they’re really doing is restricting what people can do. They’re narrowing down people’s choices. They’re narrowing down markets. They’re shrinking those markets. They’re making them less diverse. That’s how you make markets more fragile, not how you make markets more resilient. And because all government officials are people, they’re subject to the same flaws and limitations as all the rest of us. And the truth is, nobody knows beforehand which assets are going to blow up or how they’re going to blow up or certainly when they’re going to blow up.

Another problem with this whole concept, and this is a funny problem to me, is that it ignores how the world works. Before I came to DC, I used to think that there was somebody here, at least one person, who knew what was going on, who knew how to fix everything. Poring over all the data, the statistics, using whatever models they had, and they could just get on whatever problem there was, that was it. They knew exactly what to do. But once you work here, after about a week, you know there’s nobody like that here, or anywhere else for that matter. On the other hand, the sausage-making exercises that give us things like the Dodd-Frank Act and all these rules and regulations that we have, those things, those are reality.

Dodd-Frank is a great lesson, too. Like most of our major new financial laws, it was spawned out of a crisis. So the crisis hits, and then everybody starts running to Congress telling them what they think and what they want. And it’s all dressed up in the guise of, “We need to stop the next crisis,” right? “This is what we need to do to stop the next crisis.” So what happens? Members of Congress go back and forth. They make political compromises. Two years later, two full years later, we get an eight-hundred-plus-page bill, and it’s a mess, which is kind of the norm. It’s supposed to address all the problems that caused the financial crisis. But as Jeb would tell you, nobody could agree on what caused the financial crisis. The only thing everybody could agree on was we needed more regulation. And funny enough, all the people running to Congress, they’re telling them exactly the same thing: “We need more regulation.” Remember, it’s not the average American running to Congress to tell them what to do. It’s people from the industry, and it’s not even everybody from the industry. It’s a very, very small group within the industry telling them what they think and what they need and what they want. And it’s where you see the love part of that love-hate relationship really blossom.

There’s also people from the regulatory agencies. People think I’m joking when I tell them this, but believe it or not, the Federal Reserve lobbied Congress on the Dodd-Frank Act. That’s how these things work, guys. The Fed lobbied against a few things. One was a provision in an early draft of the Dodd-Frank Act that would have collapsed all the federal banking regulators into one. Well, the Fed is one of those regulators, so the Fed didn’t like that. So it lobbied and it won. And as a result, we’re still stuck with three official federal banking regulators, the OCC, the FDIC, and of course, the Fed. You might be asking yourself, “Well, why do we need three federal banking regulators?” The answer, of course, is that we don’t. But we have three.

Later on in the Dodd-Frank sausage-making process, some of the major clearing firms and exchanges lobbied Congress on Dodd-Frank for something called a derivatives clearing mandate. This is something—excuse me—this is something that would funnel billions of dollars to those companies. Well, the Fed didn’t like that either, but maybe not for reasons that you think. The Fed went to Congress and said, “No, don’t do that, because instead of people using derivatives all over the place with the risk diversified everywhere, you’re going to concentrate it in just a few really large firms. And if something goes wrong, you’re going to have to bail them out. So don’t do that.” Well, Congress stuck to their guns, and the Fed lost on this one. So when they realized that they were going to lose, they went back and they said, “Okay, fine. You’re going to do this here. You’ve got to put this in the law too.” And this is a workaround. It’s a workaround for the mandate. And what it does is it plugs those large firms directly into the Fed so that the Fed can make loans to those companies if they get in trouble. Think about that, right? Think about that process and think about the incentives in there, right? You’ve got one arm of the federal government telling another arm of the federal government—and one of them controls the money in one way, the other one controls the money in the other way—you’re going to have to do a bailout, but you don’t want to call it a bailout, so here’s a good way to do it. I mean, this is crazy, but this is a real example. All of these examples are real, and they’re just the tip of the iceberg.

This is how laws get made. This is how our system has been built. Every time something goes wrong, Congress comes in and they add new layers on top of the old layers, and the old layers are the ones that were supposed to prevent the problem in the first place. We don’t just start over. This process has been accelerating since the Great Depression, constantly ratcheting up, and what we have now is a ridiculously complex web of laws and rules and regulations that functions, at best, like a kind of crazy Whac-A-Mole game.

The Super Bowl commercial that we started with is a great example of this. That commercial was about Basel III, which of course means it was the third version of Basel, right? And it was built on Basel II, which was built on Basel I. Basel II was never fully implemented in the United States. What happened? Federal regulators were working on Basel II when the crisis hit, and that’s when everybody realized, oh no, Basel I contributed to the crisis, so you have to whack that one down with the mallet. And they also realized Basel II wasn’t going to do much better, so they had to whack that down or sweep all of it under the rug, whatever metaphor you want, and just go straight to Basel III. That’s literally what happened. So if you really think Basel III is going to work any better, okay, fine. I doubt it.

To be even more accurate with that slide, we would have had to have about 12 or so people standing around, each with their own mallet too, because you also have all these agencies enforcing this web. If you’re a full-service financial company, you could have as many as 12 federal regulators and state regulators trying to smash down all the problems and enforce those laws and rules. Even if you’re a very small, simple bank, you could still have three federal regulators plus state regulators watching over everything that you do. This is the system that we’ve been expanding for more than a century, constantly replacing regulators’ judgment for the judgment of the people who are actually in the markets. And the period is littered with financial crises.

Nobody would design a system like this. We know that it doesn’t keep us safe. We know that it makes everything more costly and more ineffective. We know that it gives a small group of people power over everyone else. It’s undoubtedly time for a different approach. The problem is that the fix is really straightforward, but it’s not politically easy. The thing that we need to do is stick to the core principles that make the case for limited government. The best way to minimize abuse of power is to not give government officials too much power to begin with. The best way to benefit from what financial markets can do is to let them be financial markets. And remember, financial markets are millions and millions of people making mutually beneficial exchanges to improve their lives. A system that gives government officials the power to tell everybody which decisions they can make and which decisions they can’t make to improve their lives defeats the whole purpose. It negates the benefits that you can get from the markets. Markets work great. Letting a few people tell everyone else what they can do never works that great.

So Jefferson and Hamilton were both kind of in the ballpark on this. What they missed, though, was that their mistrust of centralized government and power also applies directly to finance and money. Letting a handful of people decide what everyone else can do with their money is exactly the same as letting a handful of people decide what everyone else can do with their lives, and that’s bad. We shouldn’t be doing that.

I’ll leave you with one more thought. My dad passed away quite a few years ago. And I know with confidence that he never really thought too much about Basel I or Basel II. And I can’t ask him about this, but I’m good. I know that he wouldn’t have cared about Basel III or the Endgame, or any of those Avengers movies either. That’s a whole nother story, but I’m also positive that he never read a single word of the Dodd-Frank Act. Completely positive. But the thing is, all of those rules and regulations from the Dodd-Frank Act and all the laws that came before it, they all found their way to him, and thousands, if not millions, of people just like him. All that stuff shows up in how hard it is to get a truck loan or an equipment loan or a construction loan or a line of credit. It shows up when somebody can’t find a bank that’s willing to deal with a very small account, or an investor who wants to invest in a very small business. Members of Congress love to tell you that they’re fighting for guys like him. The truth, though, is that guys like my dad are never in the room or anywhere near it when they’re building this system. They’re out working, fixing things, getting covered in diesel fuel and sweat. They do not have lobbyists, and they don’t have anybody that runs to the Senate with a workaround for a bad law. We need to let markets work, because markets work better for people than government officials, especially the guy with the truck and a toolbox. A line of credit will do more for that guy and his family than any government official who thinks they know how to keep him safe, and I know that my dad would have said the same thing. Thank you.