"Politics aside, how do you feel about interstate banking?" I asked. It was 1979, and I was a relatively new board member of the Federal Deposit Insurance Corp. I was chatting with the chairman of the FDIC, who had years of Washington experience.
He looked at me quizzically and asked, "What do you mean?"
I said, "You know, apart from the bank political issues, do you believe interstate banking is a good idea?"
"You can't do that," he responded. "You can't separate the issue from its politics. Nothing will happen until the banks settle their differences, so it doesn't matter whether it's a good or bad idea."
The conversation was an eye-opener for a novice on the Washington political scene. It was my introduction to the political "pragmatist."
The pragmatist is someone who enjoys governing for its own sake. He has no strong philosophy. He's willing to accept almost any outcome as long as the process reflects favorably on the participants.
A person needs a degree of pragmatism to succeed in a political environment. A person who's insensitive to the views of others will accomplish little. Washington needs people grounded by core beliefs who are pragmatic.
Regrettably, the city is brimming with pragmatists who don't much care what they produce beyond their reelection or re-appointment. Nowhere is this phenomenon more evident than in connection with the pending financial modernization legislation.
The U.S. financial system has been operating for more than 60 years under the yoke of oppressive government regulation. The express purpose has been to limit competition.
Banks and thrifts were told what interest rates they could pay on deposits and where they could open offices. Laws were designed to keep banks, thrifts, insurance companies, and securities firms in separate arenas.
The Hunt Commission, established by Congress during the Nixon administration, recommended that much of this regulatory artifact be dismantled. Congress ignored the recommendations far too long, costing banks and thrifts and their customers, as well as taxpayers, hundreds of billions of dollars.
We eventually accomplished interest rate deregulation in the 1980s and removed the restraints on branching during the 1990s. Now two tasks remain in the drive to modernize and strengthen the financial system.
The barriers between the banking, insurance, and securities industries must be removed. Firms in each of these industries should be allowed to acquire each other.
This should not be a difficult concept to grasp and implement. The only reason it has been so difficult is that the congressional pragmatists have been captivated by the special interests and by regulators intent on protecting their turf.
The second task, which must be handled sometime soon, is reform of the deposit insurance system. It is fundamentally inconsistent-not to mention unsound-to have a deregulated financial system operating with extensive taxpayer guarantees of deposits.
The major banks, through the Bankers Roundtable, proposed earlier this year to curtail the scope of deposit insurance and eliminate taxpayer exposure to losses. The presidents of several Federal Reserve banks have called for substantial reforms in the deposit insurance system.
A lot of bankers opposed deregulation every step of the way, just as a lot of insurance agents and securities dealers, as well as some regulators, are resisting change. They're in a distinct and declining minority and shouldn't be allowed to dictate, or even significantly influence, the outcome.
The right way to approach financial modernization is to complete the process as quickly and simply as possible. The right way is to insist that those who favor government interference with the marketplace demonstrate clearly the need for such interference.
It's time for congressional leaders to sublimate the politics of financial modernization and take a stand for sound public policy.
