Interaction: Fixing American banks

Myers: Good evening, and welcome once again to Interaction, the programme in which there are stupid questions: the ones to which the answer is not Chuck Norris. Earlier this week, US president Barack Obama announced a wide ranging set of regulation on the banking industry that will, he hopes, prevent a return to the irresponsible speculation that led to the current financial crisis. Will these new rules do the trick? Will they result in the downfall of existing banks? Will they cause investors to lose all their money? Will they come as a surprise to Paul Volcker? To find out, we have convened a panel. Joining us in New York City, NY, USA is the president of the Save the Banks Fund, Mr Jerome Flanigan.

Flanigan: Hello.

Myers: In Washington, DC, USA, we have the financial editor of the Washington Underground Daily, Ms Carolyn Kapowange.

Kapowange: Hi.

Myers: Joining us from Philadelphia, PA, USA is the Edward A Murphy professor of economics at Constable University, Mr Jon Wallace.

Wallace: Good day.

Myers: And with me here in our Warwickshire studios is the author of such books as Wise Investment: How We the People Can Safeguard Our Money Without the Help of Wall Street, Ms Glenda Urse-Reinhold.

Urse-Reinhold: Good evening.

Myers: Thank you all for joining us. Jerome, to go to you first, your organisation has been active in campaigning on behalf of banks. How will the regulations that Mr Obama proposed this week affect the banking industry?

Flanigan: Well, Debbie, that’s an excellent question. These regulations will be an enormous change in the way banks do business. Banks will no longer be able to trade securities with their own money, which, as we have seen in the recent financial situation, is an essential part of the way banks currently provide value to their shareholders. Take that away, and banks will lose even more value, and the stock market will become even more vulnerable.

Myers: An interesting point. Carolyn, as a financial editor at an independent newspaper, what is your perspective on the financial meltdown?

Kapowange: Well, it has become clear that large banks are no longer acting in the interests of their account holders. They are acting in the interest of their shareholders, which is a very different thing. We’re seeing so many ordinary people being screwed out of their mortgages or of their money, all through no fault of their own. And this is really the story that is not being told.

Myers: Something important to consider there. Jon, while this is no Great Depression, are there lessons from the past that apply today?

Wallace: Absolutely there are. I think the president’s proposed reforms are a case of that. This is a step in the direction of the Glass-Steagall Act, which had been on the books from the 1930s up through the 1990s. The Glass-Steagall Act essentially defined a firm line between commercial banking and investment banking. It was, by all accounts, a great success, particularly in the years after the Great Depression. It was thought by many to be obsolete in the 1990s, and so it was abolished. But recent evidence, of course, shows that banking regulation is just as relevant as it has ever been.

Myers: A welcome perspective there. Glenda, your books have been about the power of the individual. In your most recent book, you argue that people can change the behaviour of large banking firms simply by withdrawing their money.

Urse-Reinhold: Yes, that’s right. Many people are already changing to smaller, local banks that are not listed on public stock exchanges. These banks therefore have a stronger presence in their communities, and they are much more likely to be responsive to the needs of their account holders. The evidence is that large corporate banks are making themselves obsolete by their own behaviour.

Myers: Well, Jon, as Glenda points out, there does seem to be increasing public distrust of large banks such as Bank of America and JPMorgan Chase. What effect will that have in the long run, particularly if Glenda’s suggestion becomes more popular?

Wallace: Well, Debbie, I expect that if banks see a large outflow of individual account holders, the process that we see now will continue. As you mentioned, Carolyn, banks are becoming more concerned with their bottom line. So if individual account holders continue to retreat – and particularly if that retreat accelerates – we should see banks continue to emphasise investment activities, which would in turn mean that they would lobby even more strongly against the current reforms.

Myers: Carolyn, would you agree with that?

Kapowange: That does seem to be the most likely course, but it does seem counterproductive, therefore, to pull money out of large banks. I’m not saying people shouldn’t do that. If you feel that your bank is not acting in your interest, you should certainly withdraw your money from it.

Myers: And you, Jerome?

Flanigan: I think the crucial point here is that the suggestions are never to do without banks entirely. People may suggest that you move your money from a large bank to a smaller bank, but in the end, everyone must make use of some sort of banking services. That, I think, is the message here.

Myers: So the message is, “Banks: You don’t have a choice”. Good to know. Well, it’s time now to proceed to user questions. You can see all of the ways to make contact with us. That includes text message, Twitter, telephone, E-mail, snail mail, and facsimile. And I note a very small message of support for the New York Jets at the bottom of the screen. The Jets, of course, playing an important American football game tomorrow. So then, going to our first question of the day, it is from Janeth in Little Rock, AR, USA. Janeth, are you there?

Janeth in Little Rock: Hello?

Myers: Hello Janeth. What is –

Janeth in Little Rock: Hello? Are you there?

Myers: Are we there. Carolyn?

Kapowange: Yes, we are. I’m here, you’re there, and everyone else is in other places.

Myers: All right. Kevin in Little Rock, AR, USA, are you there?

Kevin in Little Rock: Yes, and I would like to complain about that. My friend Janeth had a very good question, and you refused to hear it.

Myers: Incorrect. Janeth’s question was “Are we there”. Nothing about that question could be construed as very good for any reason. Do you have a question of your own?

Kevin in Little Rock: Why didn’t you take Janeth’s question? I demand that you take Ja–

Myers: Why didn’t we take Janeth’s question. Well, as I’m sure you are aware, questions that we receive here at Interaction that are based on false premises are disqualified with –

[Wheel of Fortune Bankrupt sound.]

Myers: Apparently they are disqualified with that sound. Well, let us continue with a question that we received on Twitter. At sign dolla seven nineteen would like to know y not clos all bnks. Jerome, y not clos all bnks?

Flanigan: Well, we should keep all banks open b/c bnks r awsum.

Kapowange: Bnks r not awsum. Bnks dstryd ppls $$.

Flanigan: & Bnks can F1 ppl recvr $$.

Myers: “F1”?

Flanigan: Help.

Myers: OIC.

Kapowange: Bnks dont care abt ppl. Bnks care abt $$.

Flanigan: Bnks care abt ppls $$. Yr bnks have prtctd ppls $$ for >=1C.

Myers: “1C”?

Flanigan: One century.

Myers: Mmkay. Well, we are going to have to move on now to our next question. It is an E-mail from Jay in Hong Kong, China PR. Jay asks, “What will be the real effects of President Obama’s proposed changes? What exactly is going to change about banks?” Jon?

Wallace: Good question. By reintroducing the separation between investment banks and commercial banks, it means that commercial banks – the ones where you and I, and most laymen, keep their money – commercial banks will not be investing in a risky manner, unless of course you specifically request that they do so with your money. This will make them less prone to go under, and less likely to require a government bailout to stay afloat.

Urse-Reinhold: That’s true, but I expect that they will continue to request government bailouts nonetheless.

Myers: And what of investment banks? There was not an extraordinary number of bank failures in the period when the Glass-Steagall Act was in effect. Will they continue to fail without more stringent regulation?

Urse-Reinhold: I don’t know.

Myers: Jon?

Wallace: I don’t know either. Certainly President Obama’s other proposals, which include outlawing investment banks from being involved in hedge funds or private equity, should make investment banks more stable. However, it is these proposals which are likely to be removed in Congress.

Flanigan: Well, Debbie, what’s important to realise here is that these changes, while billed as reforms, will surely spell the end of banking as we know it today.

Kapowange: Banking as we know it today got us into the financial crisis as we know it today.

Wallace: That is certainly true. Banking as we know it today is vastly different from banking as we knew it just twelve years ago.

Myers: Yes, and twelve years ago, the global economy was largely not in a collapsed state.

Wallace: Certain parts of Asia notwithstanding.

Myers: Well, we have time for one more question. Leslie in Detroit, MI, USA, are you there?

Leslie in Detroit: Yes, I am.

Myers: Leslie, hello. What is your question?

Leslie in Detroit: My question is for the woman in the blue.

Myers: That would be me.

Leslie in Detroit: All right. Well, my question for you is: Why didn’t you wear green? You’re talking about money. You should have worn green.

Myers: I’m British. Our banknotes are a dazzling variety of colours.

Urse-Reinhold: Then you should have worn a dazzling variety of colours.

[Pause.]

Myers: This programme is over. Thank you to Ms Glenda Urse-Reinhold, Mr Jon Wallace, Ms Carolyn Kapowange, and Mr Jerome Flanigan for being with us today. When we see you again next week, we will be discussing the original Macintosh 128K and its effect on the computing world. We’ll be speaking with two computer historians, one of the Macintosh for Dummies authors, and the author of the recent op-ed piece, “Why Macintosh for Dummies Is Redundant”. So join us again for that next week. Good night.

Urse-Reinhold: Seeing as how the original Mac logo was all rainbowy, will you wear a dazzling variety of colours next week?

Kapowange: Yeah. Or maybe you could wear authentic 1984 leg warmers.