Banks and their allies have been using every opportunity possible to blame regulations for changes in their business models after the crisis, particular if they can make it sound like the broader public, as opposed to their bottom lines, is what is suffering. Normally this messaging effort stays at the background noise level, but sometimes the lobbyists succeed in getting their message treated as a story in its own right.
A recent example is a Financial Times story early this week: “Dodd-Frank has made banks safer but slowed economy, data show.” An alert reader could easily use this story as a “Where’s Waldo” test for finding how many bogus arguments are packed in a single piece.
Let me give you a few.
1. The story line comes from a single source, the faux objective “Goldman Sachs Global Markets Institute, a public policy research unit.”
2. The article, and therefore presumably the Goldman paper, does not out the claim that regulations hurt the economy. It contends that mortgages and other investments are more costly than before the crisis. The unstated argument is that people would borrow more if credit were cheaper. But as Richard Koo has pointed out, in a balance sheet recession, consumers and businesses prioritize paying down debt. And the weak job market is enough to make anyone think twice about borrowing much. Similarly, small business loan demand has been weak due to (*gasp*) not so hot conditions in a lot of markets.
3. Let’s get to the big howler. What’s the basis for comparison for credit pricing to consumers and small businesses? 2007, the peak of the credit bubble, when the world was awash in liquidity. An average of years over the pre-crisis period would have been a more convincing basis for any analysis.
4. Why does the FT assume, following Goldman, that these pricing increases are the result of evil regulation, as opposed to lenders being in a period where they are actually making sensible loans most of the time?
5. Why does the story assume that the cost side (driven by those evil regulations!) is the reason for the increased pricing? How about, “This is what the market will bear”? Remember, one of the effects of the crisis was to increase concentration in banking even further. For instance, American Express used to have far more credit products to small businesses than it does now. Similarly, one of the major credit card issuers to small businesses, Advanta, went bust. Less competition generally means more pricing power.
6. Big banks are also lousy at making small business loans. As we have discussed from time to time in the comments section, they have abandoned the practice of training credit officers, some of whom would wind up as branch managers and were expected to use their judgment and knowledge of local economy in making lending decisions. Now big bank branches are retail stores and small business loans (to the extent banks really make any) are score-based decisions (oh, and the biggest sources of funding to small businesses have long been savings, friends and family, and credit cards). In a happy bit of synchronicity, Lambert pointed out a new VoxEU post that underscores this issue, that banks that engage in “relationship lending” (as in they actually bothered getting to know the owners and the business of the business) are less likely to cut off the credit supply to business in bad times. And mirabile dictu, that increases their survival rate:
Data from 21 countries in central and eastern Europe show that ‘relationship lending’ alleviates credit constraints during a cyclical downturn but not during a boom period. The positive impact of relationship lending in an economic downturn is strongest for smaller and more opaque firms and in regions where the downturn is more severe….
While there is no relationship between firms’ access to bank finance and the dominance of relationship or transaction lenders in 2005 (during the height of the credit boom in many of the sample countries), firms’ access to credit suffered less in 2008/9 in localities dominated by relationship lenders. The economic effect is also large — moving from a locality with 20% relationship lenders to one with 80% relationship lenders reduces the probability of being credit constrained in 2008/9 by 31 percentage points…
All the results are confirmed when we control for possible selection bias by explicitly controlling for the lower credit demand in 2008/9.
Now this also means if you have any savvy as a borrower, you will try to go with a bank that is relationship oriented, rather than the local branch of a TBTF. That might indeed mean a more costly loan to you, but that’s the price of having a lender less likely to cut you off because he has to meet some sort of headquarters panicked imperative in a bad time.
7. Even banking stalwart Gene Ludwig distanced himself from the Goldman thesis rather than backing it:
Gene Ludwig, chief executive of financial advisory firm Promontory and former Comptroller of the Currency, said the full extent of the costs of regulations on consumers will not be known for several years because not all of the rules have gone into effect.
“There is some trade off between the costs it takes to achieve safety and stability and the cost of products,” Mr Ludwig said. “To some degree, banks may well be passing on some of the cost of increased capital and regulation to their customers.
But you can see how effective this relentless barrage of “meanie regulations” is, particularly since many readers only look at the headlines or skim the opening paragraphs. Even so, the majority of comments on this piece (and remember, the Financial Times presumably has a reasonably bank-friendly readership) wasn’t buying what the Goldman analysis was selling. So the people who were interested enough to read the story in many cases weren’t persuaded by the con. But whether enough people are really paying attention to these intellectual shell games remains to be seen.