ABSTRACT
This chapter argues that the role of the U.S. financial structure is to perform three functions: fostering of productive investment, enhancement of economic opportunity, and maintenance of a stable economic environment. But this structure’s recent performance has been wanting in all three areas. Simply eliminating remaining barriers to market entry will not achieve the three functions, because financial relations are replete with spillover effects and informational problems that must be factored into any regulatory and institutional design for a fully functional financial structure.
First, the chapter develops a perspective on the design of the U.S. financial structure and on why it has become dysfunctional. That perspective, common to all of the chapters in this section, is contrasted with both the free market and narrow-banking perspectives on financial reform.
Then the chapter proposes broad reforms for the U.S. financial structure, which incorporate the proposals set out in greater detail later in this section. These proposals call, first of all, for leveling the financial playing field, as do the free market and narrow-banking proposals:
Deposit insurance should be restricted in focus;
Interstate and product line expansion for intermediaries should be allowed;
Strict capital adequacy and oversight guidelines should be affirmed and applied for all financial intermediaries;
The too-big-to-fail doctrine should be repealed, but the lender-of-last-resort principle should be affirmed.
But the proposals made here then go beyond the free market and narrow-banking perspectives by arguing for additional measures designed specifically to foster economic opportunity and productive investment while discouraging 102redlining, discrimination, and speculation. These impositions into “pure” market outcomes are needed in order to renew the social contract between financial intermediaries and the firms and households for whom access to credit for productive purposes is problematic in autonomous markets. The proposals for “renewing the social contract” encompass five points.
All financial intermediaries should comply with the D'Arista-Schlesinger licensing proposal;
All financial intermediaries, not only banks and thrifts, should meet minimum performance requirements under the Community Reinvestment Act (CRA);
Regulatory monitoring of CRA performance should not be held hostage to prudential regulation for intermediary safety and soundness;
Innovative programs and institutions should be encouraged for depressed areas, and these alone should receive institutional subsidies and guarantees;
Infusions of public funds into intermediaries in the course of lender-of-last-resort interventions should be treated as an ownership interest, and the intermediaries in question should orient their activities toward accomplishing public purposes.
