Pearls of Wisdom: We Need Dodd-Frank

Back in 2008 Henry Paulson, the Treasury Secretary in the Bush administration, needed to put billions of dollars of the taxpayers money at risk to bail out the big banks. We as a nation have decided that we never want to do that again. Well, I thought so until recently, when Republicans in the House passed a bill repealing large parts of Dodd-Frank.

The way banks work, very broadly, is that the bank takes in money from depositors and uses most of the money to make loans. The bank charges higher interest on the loans than it pays on the deposits. That excess interest is enough to pay for the bank’s overhead, cover small amounts of losses (when loans are not paid off), and make a profit for the owners of the bank.

People are only willing to deposit their money in banks and earn very little interest because they know their savings are completely secure. The deposits are guaranteed by the FDIC (part of the United States government). That means if a bank fails, the US taxpayers are ultimately on the hook to reimburse all of the depositors.

If that was the whole story, every smart banker would make the riskiest possible investments. Bet it all on red – if you win you get to keep the winnings, and if you lose the taxpayers will cover the loss and you can just find another bank to work at next year. Fortunately, banks are not allowed to do that. The US government has regulations to prevent banks from taking too much risk. That’s what we mean when we say banks are “regulated”.

All regulations have plusses and minuses. It is true that banks could generally make more money if they were not regulated, but we, as a society, do not want to accept either depositors or the taxpayers ultimately being at risk when the bankers get to keep all of the profits.

Now, some bankers (and some members of Congress) want to change the rules. They want to allow bankers to get almost all of their money from depositors (ultimately guaranteed by the US taxpayers) and even less from the owners of the bank. That increases the risk to the taxpayers, with all of the benefit going to the bank’s owners. They are right that this will increase the profits of the banks… in most years. In the really bad years, it will increase losses – for taxpayers.

Increasing the profits for bankers and increasing the risk for taxpayers is not the message that voters sent to Congress on election day — but it is apparently the message Congress received. Let’s hope they hear a different message before it’s too late for taxpayers.

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