The new Cato Institute 2017 Financial Regulation national survey of 2,000 U.S. adults released today finds that Americans distrust government financial regulators as much as they distrust Wall Street. Nearly half (48%) have “hardly any confidence” in either.
Americans have a love-hate relationship with regulators. Most believe regulators are ineffective, selfish, and biased:
- 74% of Americans believe regulations often fail to have their intended effect.
- 75% believe government financial regulators care more about their own jobs and ambitions than about the well-being of Americans.
- 80% think regulators allow political biases to impact their judgment.
But most also believe regulation can serve some important functions:
- 59% believe regulations, at least in the past, have produced positive benefits.
- 56% say regulations can help make businesses more responsive to people’s needs.
However, Americans do not think that regulators help banks make better business decisions (74%) or better decisions about how much risk to take (68%). Instead, Americans want regulators to focus on preventing banks and financial institutions from committing fraud (65%) and ensuring banks and financial institutions fulfill their obligations to customers (56%).
Americans Are Wary of Wall Street, But Believe It Is Essential
Nearly a decade after the 2008 financial crisis, Americans remain wary of Wall Street.
- 77% believe bankers would harm consumers if they thought they could make a lot of money doing so and get away with it.
- 64% think Wall Street bankers “get paid huge amounts of money” for “essentially tricking people.”
- Nearly half (49%) of Americans worry that corruption in the industry is “widespread” rather than limited to a few institutions.
At the same time, however, most Americans believe Wall Street serves an essential function in our economy.
- 64% believe Wall Street is “essential” because it provides the money businesses need to create jobs and develop new products.
- 59% believe Wall Street and financial institutions are important for helping develop life-saving technologies in medicine.
- 53% believe Wall Street is important for helping develop safety equipment in cars.
Wall Street vs. The Regulators: Public Attitudes on Banks, Financial Regulation, Consumer Finance, and the Federal Reserve
When banks are in distress, it is important to assess how easily the bank’s capital cushion can absorb potential losses from troubled assets. To do this, I performed an analysis using Texas Ratios for Greece’s four largest banks, which control 88% of total assets in the banking system.
We use a little known, but very useful formula to determine the health of the Big Four. It is called the Texas Ratio. It was used during the U.S. Savings and Loan Crisis, which was centered in Texas. The Texas Ratio is the book value of all non-performing assets divided by equity capital plus loan loss reserves. Only tangible equity capital is included in the denominator. Intangible capital — like goodwill — is excluded.
Despite the already worry-some numbers, the actual situation is far worse than even I had initially deduced. A deeper analysis of the numbers reveals that Greece’s largest banks include deferred tax assets as part of total equity in their financial statements. Deferred tax assets are created when banks are allowed to declare their losses at a later time, thereby reducing tax liabilities. This is problematic because these deferred tax assets are really just “phantom assets” in the sense that these credits cannot be used (read: worthless) if the Greek banks continue to operate at a pretax loss.
The European Union (EU) is still in the midst of an economic slump. Many members of the political class in Brussels claim that fiscal austerity is to blame. But, this diagnosis is wrong. The EU’s problem is one of monetary, not fiscal, austerity. Money matters. Just look at the accompanying chart. Private credit in the Eurozone has been shrinking since March 2012.
Despite every major US bank being declared by regulators as “well capitalized” prior to the financial crisis, we still found ourselves watching the government plow hundreds of billions of capital into said banks. How can this be? The answer is quite simple: we were lied to. Maybe that’s a little harsh, after all these banks did meet the regulatory definition of “well capitalized”. But when push came to shove, market participants rightly ignored regulatory capital. After all you cannot use things like “deferred tax losses” to pay your bills with.
The U.S. isn’t Greece. Yet.
Moody’s is no longer so sure about the quality of Uncle Sam’s debt. Reports the Christian Science Monitor:
Further to Ilya Shapiro’s post this morning, let me also point you to a concise chronology of events culminating in the government’s robbery of Chrysler creditors.
The housing boom and bust that occurred earlier in this decade resulted from efforts by Fannie Mae and Freddie Mac — the government sponsored enterprises with implicit backing from taxpayers — to extend mortgage credit to high-risk borrowers. This lending did not impose appropriate conditions on borrower income and assets, and it included loans with minimal down payments. We know how that turned out.