What we most need right now is a national conversation about the economy and America's future. What we least need is more bank bashing — at the moment something of a national pastime, but an activity that is highly unproductive, not to say unfair.
In the search for someone to blame, "bank" has become shorthand for "any financial company." But there is of course a world of difference between regulated banking organizations and unregulated and underregulated financial institutions. The fact is that economic decision-making was grossly distorted by lightly regulated or wholly unregulated nonbank financial companies. Nonbanks were the pacesetters in a cutthroat race that put sound underwriting practices on a collision course with competition for customers and markets.
More important, bank bashing misses the real point. Banks and banking did not "cause" the financial crisis; they were swept up in the fallout from the buildup of massive imbalances in foreign trade accounts and the country's desire to spend more than it earned. We will not "cure" the financial malaise that we are living through unless we cure the underlying economic problem; everything else is not much more than Band-Aids.
Our economic problem has its roots in excessive reliance on spending since the end of World War II. We failed to recognize that an economic pyramid based on overleveraged consumers would perforce crumble. Overspending on housing became the next layer of the pyramid, particularly in the last decade, when we deluded ourselves into believing price increases in homes and second homes were a substitute for savings, indeed were an acceptable excuse for profligacy.
Finance as a facilitator of market activity played its role in this drama, in many ways because U.S. finance was too good. It used modern technology and innovative relationships to make more efficient, more sustainable, more expansive, the paradigm that shaped our economy.
A fair analogy of what is fundamentally wrong is the health pyramid. When many of us grew up, we were taught that the most important elements of a good diet were meat, eggs, and butter. Exercise was not even on the pyramid. Today the pyramid starts with exercise and moves on to whole grains. (I hope the new pyramid is right, because it's a lot less fun than the old one.)
Similarly, the economic pyramid of the last several decades — based almost entirely on consumer spending and housing, irrespective of savings, domestic business activity and balance — has to be changed. Absent this change, all the regulation in the world will not fundamentally solve the financial puzzle.
But changing our mind-set about what the economy should be all about is only a partial solution. There are a host of critical issues. In an interconnected world where PhDs in India earn a fraction of what PhDs in the U.S. make, let alone where the wage disparity is even greater between the U.S. and less-developed countries for less-well-educated labor, how do we now build sustainable businesses in the U.S.? How do we really achieve energy independence so that we can get on top of our trade deficit? What do we do about a secularly overvalued Chinese currency, where government fiat, not market forces, sets the valuation? What will be the industries for the 21st century that produce jobs and prosperity? And how do we rebalance our economy with increased savings without creating the conditions for a prolonged period of very slow growth, if not recessionary conditions?
Of course, these questions are not easily answered. But answering them should not be about partisan politics and buzzwords. We should form a national bipartisan blue-ribbon panel of business leaders, financial leaders, economists and, ideally, government officials with a professional staff to come up with practical solutions to the problems facing our economy. If government does not take the lead on creating such a group, the private sector — perhaps even the banking sector — should take it upon itself to do so. This may yield the best result in any case. The private sector relies too much on government to come up with policy solutions. There is a real virtue in having the private sector take the lead and make suggestions that at least start the national debate.
If we don't address these fundamental issues, all the bank regulation in the world will not produce a stable financial system. On the contrary, ill-considered regulation will result in less of an ability to deal with our economic woes and produce more financial instability. This is not to say that financial industry regulatory reforms are not important or not needed. They are both. However, to be effective they must go hand and glove with more profound changes in the focus of our economy.