Capitol Confusion

Capitol Hill’s misplaced (and often contradictory) observations can lead to confused legislation—and, quite often, capital confusion.

The Senate Banking Committee convened Wednesday to run a little Q&A on banking. No doubt some enjoyed the prospect of what was likely to be another Beltway versus Wall Street showdown. But in our view, it served more than anything to highlight the confusing conclusions you reach if you follow politicians’ musings. (Keeping in mind, as ever, we remain politically agnostic, finding much to dislike about politicians in general, party affiliation aside.)

Consider this recent comment from President Obama: “I know that there’s a perception sometimes that there’s all kinds of regulations coming out of Washington, the truth is actually we’ve seen fewer regulations coming out of my administration than the previous administration.” Feel free to debate that if you wish, but consider then-candidate Obama ran his first campaign on a platform of more regulation in the 2008 fiscal crisis’s wake—ascribing its origins primarily to the “Wild West” days of the previous administration. Again, we’re not making a political statement here, other than to point out these two claims are by definition mutually exclusive. (Not unlike his predecessor’s pro-business rhetoric and platform, which was followed by the decidedly anti-business SarbOx—seems neither party’s immune to this particular brand of confusion.)

And Wednesday’s Banking Committee hearing revealed similar confusion among some of the Senators. For example, the basis for the hearing was ostensibly to discuss the amount of and appropriateness of large financial institutions’ risk levels—presumably because the concern is there’s currently too much risk. Yet one Senator questioned large institutions’ loan-to-deposit ratios—suggesting some have too-low ratios because they aren’t making enough loans. More loans generally equal more risk. So which way is it? Should banks increase their leverage ratios (and, thereby, their risk levels) to make more loans, or should they be more conservative and bolster capital ratios? Then, too, some of the Senators appeared to have lost their crib sheet on the 2008-2009 financial panic—forgetting details like how TARP money was dispensed.

All of which highlights a couple important facts: First, capital markets’ operation is incredibly complex—the fact politicians can pretty easily twist themselves up is Exhibit A. Second, the likelihood politicians—many of whom have never worked in, around or anywhere close to the industries they make rules for—come up with sound legislation that has only the intended consequences and no unintended consequences is (rounded to the nearest whole number) zero.

Granted, plenty of this is tied to the fact politicians, when it’s all said and done, are elected—meaning they’re far more likely to say what’s politically popular, expedient, beneficial, etc. to help their reelection chances. So maybe they understand more nuance than they let on. But that’s little comfort when at stake is capital markets’ smooth and efficient functioning—a key component of global economic success. If politicians’ views are flexible enough to change with the political winds, that seemingly decreases further the likelihood sound legislation results from many (if not most) of their musings.

And all this contributes to what was eloquently referred to Wednesday morning as “capital confusion”—defined roughly as confusion among financial institutions as to the game’s rules. Which leads in turn to a disinclination to make many moves—to increase loan-to-deposit ratios, for example—until such confusion is cleared up. Legislation like Dodd-Frank, which estimates indicate will necessitate some 240 new rules, hardly contributes to clarity—especially when over two-thirds of the rules haven’t been written two years from the law’s passage. And if Wednesday’s hearing was any indication, further clarity doesn’t seem terribly imminent.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.