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Write banking rules that withstand political winds

Leveling the financial-regulatory playing field requires a complete rewrite of U.S. financial services law, action that would be stoutly and effectively resisted by battalions of well-paid lobbyists.

A politically plausible approach to reducing many of the regulatory hills and raising up the valleys instead uses the body of current law to the greatest extent possible to allow access to taxpayer-backed benefits only to companies that are directly (or indirectly) bound by the rules established to protect taxpayers and the nation more generally.

There is, though, a middle and more practical course. It does four things: applies like-kind rules to like-kind activities; reduces unnecessary barriers to financial services for underserved or at-risk households; creates special-purpose, regulated charters focused solely on equality finance under rules ensuring that regulatory rewards are obtained only upon providing high-value equality services; and designs a new payment system that includes digital currency crafted with equality objectives kept firmly in mind.

So why not just deregulate?

Wholesale deregulation would certainly be popular to a phalanx of powerful financial industry lobbyists. However, industry-focused deregulation without equality-enhancing recalibration would repeat all too many previous incidents in which policymakers rushed to reduce what was described as unnecessary “regulatory burden” on grounds that it increases “American competitiveness.” These ended in disastrous financial-market and even macroeconomic crashes.

We know this going back to the 1920s, when Congress roared into a regulatory rewrite dissolving many of the rules on finance demanded by Theodore Roosevelt and his progressive allies.

We learned this again in the 1980s, when the savings-and-loan crisis was fired up by regulatory relaxations, such as a memorable plan allowing regulators to issue “net-worth certificates” that masqueraded as capital in the name of increased homeownership.

We learned the dangers of carefree deregulation the hard way all over again in 2008. Even as finance trembled in 2007 ahead of the great financial crisis, the Bush administration’s Treasury Department issued a “blueprint” replete with regulatory rollbacks that made big banks, securities firms and private-equity companies very, very happy. There wasn’t time enough to roll back all these rules before the 2008 financial cataclysm eviscerated the industry.

In 2010, Congress reversed course, directing a tough increase in safety-and-soundness regulation. This made banking safer but most of us still poorer.

Even so, bank regulators in the Trump administration were busily deconstructing the 2010 rulebook when, in 2020, crisis struck yet again. The risks of light-touch regulation were all too evident in 2020 not because banks were fragile — they largely weren’t thanks to what was left of the post-2010 rules — but because the rules applied asymmetrically.

This opened the way for…

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