There is nothing new about bankers going off the rails or governments trying to rein them in.
One of the more sophisticated banking sectors was established in Venice in the Middle Ages. By 1361, there already had been sufficient abuse in banking that the Venetian Senate passed a law forbidding bankers to engage in any other commercial pursuit, thus removing the temptation to use their depositors’ funds to finance their own ventures. Sound familiar? They were also required to open their books for public inspection and to keep their stockpile of coins available for viewing at all reasonable times. Today this would be regulations to require transparency and holding sufficient reserves to guarantee that they could meet demands by depositors for their money back. To enforce these rules, in 1524, a board of bank examiners was created, which is possibly the first banking oversight regulatory body in history.
Even these early regulators had difficulties keeping their charges under control. In 1584, the house of Pisano and Tiepolo, the largest bank at that time, had to close its doors. It had been lending against its reserves and was unable to refund depositors. The government picked up the pieces and, because banking was important to its trading empire, it created a state bank: the Banco della Piazza del Rialto. What a pity that politicians are so ignorant of history and bankers are determined to repeat history as they continued to engage in risky lending and then expect the government to bail them out. The difference is that they now have powerful lobbies to resist changes to laws that would address structural problems.
US Treasury Secretary Timothy Geithner weighed into this debate with an op-ed titled “Financial Crisis Amnesia” that appeared in the Wall Street Journal on March 1, 2012. He blamed the global financial crisis on reckless credit practices in the private sector and bewailed inadequate oversight rules. Geithner saved his venom for bankers and the financial sector whom he accused of amnesia. “There was no memory of extreme crisis, no memory of what can happen when a nation allows huge amounts of risk to build up outside of the safeguards all economies require.”
Setting out the problem, he pointed the finger at the shadow banking system, which is largely unregulated as its derivatives markets grew to more than $600 trillion, with little transparency or oversight. While a few zeros might be added to the figures, the problems are little changed from banking woes, endemic in the Republic of Venice seven hundred years ago. Unfortunately, his burst of honesty did not include attacking his political masters, who happily took the banking industry’s shekels on the understanding that banking regulations would not be strengthened. In any case, tame regulators don’t use the powers they have, knowing that banking lobbyists have friends in Washington. As an insider, he knows how the system works, but Geithner’s moment of frankness has its limits.
But it was not Geithner’s objective to clean out the stables. It was to counter the growing influence of banking lobbyists, who have mounted an effective campaign against change. To anyone who would listen, Geithner claimed:
Remember the crisis when you hear complaints about financial reform—complaints about limits on risk-taking or requirements for transparency and disclosure. Remember the crisis when you read about the hundreds of millions of dollars now being spent on lobbyists trying to weaken or repeal financial reform. Remember the crisis when you recall the dozens of editorials and columns against reform published on the opinion pages of this newspaper over the past three years.
It was a good argument, but considering that bankers have practiced forgetfulness for hundreds of years, what hope does Geithner have?