"The good news is that we are travelling at record speed. The bad news is that we are hopelessly lost." The apocryphal airline pilot might have been describing the government's effort to re-engineer the U.S. banking system.
There are rare times when paradigms fail and a major system is shaken to its foundation. When this happens, firefighting has its limits, patchwork solutions their sand traps and creative strategic thinking challenging current beliefs is required. We are at such a moment. As the great recession begins to recede into history, it leaves in its wake an uncertain future. After several years of the central government and the Federal Reserve grappling with the near collapse of the banking system by spending trillions of dollars, enacting major legislation, leading a massive and ongoing restructuring of the regulatory framework, and seizing/collapsing/transforming/rescuing major and minor financial institutions, the "vision thing" — where we want to go, the "big picture" — is still absent from public view.
Many of the government-driven changes that are in the pipeline or have already been launched, will alter the banking system profoundly, be difficult to undo and require a major investment of time and capital to achieve. The changes need to be considered against a sound, equitable, consistent and publicly endorsed vision and executed within a framework of transparent objectives, strategies, tactics, goals and controls. Instead, what appears to be a series of casually related, at best, fixes has emerged bereft of a unifying vision.
What should the financial system and its components look like and how should they interact? What should the rules of the game support? What does the public support? Are we trying to re-establish a bulletproof version of the system that immediately preceded the meltdown?
A system whose bank supply-side was, and still is, characterized by a handful of giants, with extremely complex business models, and thousands of other banks with relatively tiny shares of the market. The giants continue to offer a vast array of products and services to a huge client base in multiple market segments across the globe without the constraints of Glass-Steagal. They are able to process transactions on a massive scale, utilizing the sophisticated and complex management and technological expertise that they have developed over many years.
The other banks, which were disappearing with apparent inevitability before the meltdown, continue to disappear, probably leading to a system that verges on being noncompetitive and lacking some of the local sensitivities that smaller market segments demand and that traditional banking prided itself on possessing.
An alternative vision might eschew some of the benefits of a giant-dominated system, constraining the giants and encouraging a highly competitive market. Or, do we want some other vision? Various possibilities have been discussed over the past few years, but largely within the various silos of banking and government with limited public participation and no final determination.
There are numerous profound issues requiring a unifying vision: "Too big to fail"; determination of the entities to be regulated and monitored to avoid systemic failure; filling the role of the classical investment banks, that are now either defunct or absorbed into holding companies as sister companies of commercial banks, that possessed the necessary regulatory freedom and the risk-taking spirit required to spur the economy; the proper role of the executive and legislative branches and of the Fed during a crisis; the way in which the system should support housing and other societal ends; the disposition of Fannie Mae, Freddie Mac and the Government National Mortgage Association; the proper way to manage enterprise risk; etc., etc. The resolution of today's burning issues should support a vision, not back into one.
Developing a vision is a complex and time-consuming task. The vision is not meant to be a straitjacket imposed by some central, all-knowing entity, but rather a guiding light that brings a wider rationality to seemingly disconnected efforts. There are certain characteristics it must have, it must: be powerful and flexible enough to endure over many years; be clear enough to spawn a strategic framework of objectives, strategies, tactics and controls; have a well-defined domain; and be flexible enough so as to not overly constrain creativity and be adaptable to reality, but constraining enough to keep it from becoming useless.
Public policy aimed at re-engineering the banking system needs a positive core, a vision to track against.
