Washington is unlikely to reach a compromise over regulatory relief for community banks anytime soon. That's because the battle over regulatory relief is not about politics. It's about ideology.
Two clashing worldviews dominate the conversation about bank regulation today. The first espouses the self-correcting power of the invisible hand of free markets. This ideology prevailed in the era of Ronald Reagan and Margaret Thatcher. But in the aftermath of the financial crisis, it seems to be losing steam.
The other ideology, backed by President Obama and Sen. Elizabeth Warren, fashions banking as a public utility to be controlled by elite central planners who are unsullied by self-interest.
Politicians compromise. Ideologists don't — even when they are confronted with inconvenient facts.''
For example, Federal Deposit Insurance Corp. Chairman Martin Gruenberg paints an incomplete picture of community banks' health in his report on the industry's second-quarter results. "On balance, the industry — and community banks in particular — experienced another positive quarter," he asserts.
This sanguine commentary bolsters the Democrats' view that the Dodd-Frank Act has actually helped community banks. But it ignores the fact that the number of banks with under $1 billion in assets fell 5.6% in the second quarter from the year before — the second-largest percentage reduction since 1984. Moreover, the annual shrinkage rate in the number of banks under $1 billion has accelerated every quarter but one since the third quarter of 2012.
Today, there are 1,524 fewer banks with assets under $1 billion than there were on June 30, 2010 — just a few days before Dodd-Frank was signed into law.
The data cited by the FDIC chairman will only help his fellow Democrats avoid the political compromise necessary to reverse unproductive burdens that are weighing on the nation's community banks.
Mr. Gruenberg's comments appear to be in keeping with the FDIC's big-picture view of banking. When current FDIC vice chairman Thomas Hoenig was president of the Federal Reserve Bank of Kansas City in April 2011, he gave a speech to the National Association of Attorneys General in which he described banking as a "public utility."
To be precise, Hoenig said, "You're a public utility, for crying out loud."
Six months later, the Obama administration nominated Mr. Hoenig to the highly influential position of vice chairman of the FDIC.
Mr. Hoenig is not alone in his distrust of free-market competition. Even former Fed chair Alan Greenspan suggested he'd lost faith in the principle during his 2008 testimony before Congress.
Then-House Rep. Henry Waxman asked Greenspan, "In other words, you found that your view of the world, your ideology, was not right, it was not working?"
"Absolutely, precisely," Mr. Greenspan responded. "Those of us who looked to the self-interest of lending institutions to protect shareholders' equity, myself included, are in a state of shocked disbelief."
As Greenspan's comments suggest, the banking crisis humbled free-market advocates. Dodd-Frank and its 848 pages of law and 400 rules are evidence that this ideology is in retreat and the belief in banking as a utility is filling the void.
The politicians who support the idea of banking as a public utility may not be very concerned with the fate of community banks. Rather than say so directly, they gloss over the facts. But the great irony is that the ideologists' failure to compromise makes the big banks more powerful and the small banks weaker.
Come to think of it, maybe that's the real goal. If banking is a public utility, how many banks does the nation really need?
Richard J. Parsons is the author of Broke: America's Banking System. He is writing a new book about the future of U.S. banking.