With apologies to George Dangerfield, who published The Strange Death of Liberal England in 1935 chronicling the collapse of the British Liberal Party prior to World War I, I’m borrowing his title for this commentary.  Okay, bear with me.  Regrettably, we may be witnessing something happening to our banking system which is somewhat reminiscent of the death throes of one of England’s great political parties. The Liberal Party expired in the years leading up to the Great War not because of some single momentous and metamorphic event, but because of a series of modest crises, each in its own right small bore which, at the time, was not viewed as terribly consequential.  It failed because of the stultifying, dismal and confused responses of the Liberals to these events.  In the end, the party became untenable as a party of government.  Let’s hope no one writes that book about our banking system in the years to come.

Our enormously complex, interdependent, vibrant, entrepreneurial, adaptive, world girding and dynamic U.S. banking system has played a seminal and still critical role in making this economy succeed.  It is now under assault by large segments of our political elites and their attendant and enabling (self-identified) intelligencia.  This fraternity inspired by the twin idee fixe that the Great Recession was caused by the failures and failing, economic, structural and ethical of our banking system and a fabulist conviction that banking can be “fixed.”  This is a chimerical crusade to overturn the business cycle.  Fruitless and dangerous.

Dodd-Frank and its progeny in the United States and the echoes of Dodd-Frank across pretty much all of the western world constitute a complex symphony of risk mitigation strategies.  A symphony conducted with, as we’ve said so often in this commentary, really striking indifference to the limitation of our knowledge.  The hubris is striking.  The notion that right-thinking people, infused with certainty and a layman’s grasp of the complex theoretical musings of a largely left-of-center clique of economists emboldened by a powerful and un-self-aware confirmation bias, is astounding.   Once the Kool-Aid is imbibed, it stands to reason that we can transform our banking system into something which serves the public good, always gets it right, which is dynamic but not self-interested, and which is “fair” and corporalistic.  A city-on-the-hill type of system, a perfect utility.   It is also, at its foundation, an expression of the high school garage hobbyist tinkering with dad’s hi-fi.  It is a fanciful notion that our banking system and broader economy are Newtonian constructs where, in a steampunk sort of way, levers can be pulled and specific outcomes obtained.  Not only do our policy elites not really know which levers to pull, but they have no clue as to what happens when they pull them.  To me, the mascot of this reality is that poor benighted DEP inspector in the first Ghostbusters movie (“Shut this damn thing down now.”).  Chaos ensued.

From such conviction, from such certainty, comes rules, bright lines and almost 24,000 new pages in the Federal Register just from Dodd-Frank alone.

Don’t these folks get it that they might have it wrong?  Do they have no sense of history?  Do they have no concern, perhaps deeply buried under the armor of their conviction that they are less Dr. Jonas Salk and more Nostradamus, the famous plague doctor (and predictor of all sorts of silly things – how perfect!) that bled his sick patient and when the patient got sicker, bled him more?  (And when the patient dies, confesses that he really wished that he bled him earlier.)

We have talked about, and will certainly come back and talk about some of the laws, regulations and regulatory initiatives in more detail, but we thought it time to just stop and look at the accretion of rules, regulations and initiatives designed to make banking safer.  Some of these actually may achieve in some measure their intended results, but the accumulation of unintended consequences, each building on another, none perhaps doing more than a modest amount of damage to the system, but in toto, actually managing to make the system materially less effective, in fact, less safe.

So next week, we’ll recite this litany of woe and remind everyone about all these many and deeply flawed regulatory initiatives and talk about Rep. Hensarling’s Don Quixote-ish crusade to make it all go away.  But for the moment, let’s just pause and appreciate the startlingly broad, wide and intellectually suspect scope of governmental interference and tinkering with our banking system and market performance over the past several years.  Can we stop for a second and at least admit that bankers are not bad people, and that banking is not an evil institution?  Can we stop for a minute and think that banking has grown and matured and has been increasingly professionalized over the last hundred years and has actually done an awfully good job of providing the credit (and mitigation of risk) which is the lifeblood of our economy?  Can we stop for a moment and observe that since no system is perfect, that the perfect can be the enemy of the good, that the cure can be worse than the disease?

To the extent all this regulatory strum und drang reduces risk, it has done so largely by simply diminishing the efficiency and efficacy of our banking systems.  Less business, less risk!  Hey, simple!  That prescription apparently is okay to the political and regulatory elites at the tiller.  A poorly functioning, ineffective and diminished banking system seems to be just fine, thank you, if the regulatory remedy they administer can be ballyhooed as having protected us from risk.  It reminds me of the old joke about the Frenchman, Englishman, Irishman and Russian at the Pearly Gates.  St. Peter asks each of them for a boon (I’m sure there is an equivalent version in each of the world’s major religions, just to be totally PC about it).  The Frenchman, Englishman and Irishman all talk about how they would love to see their family thrive, have a farm, own a vineyard, run a small business, etc.  When St. Peter asks the Russian, he pauses for a moment and says, “all through my life my neighbor had a cow.  I wish my neighbor’s cow would die.”  Is there something here about killing the neighbor’s cow?

To use a phrase coined by my good friend Cliff Rogers of the Real Estate Roundtable, it looks like they’re trying to turn our banks into money museums.  “Look, kids.  This is what money used to look like.  Don’t touch it now, it’s dangerous.”  Maybe there’s a notion here that beating up the banking system, which seems to be a path to populace cred in modern politics, is okay because the banking system is so strong that all this beating will really not hurt the overall economy.  But hey, remember the straw that broke the camel’s back?  At some point, capital piled on capital, regulatory restraint piled on regulatory restraint, prudential review piled on prudential review and layer after layer of second, third and fourth guessing will cause the whole enterprise to shudder to an inglorious stop.

When will we know this?  Well, we’ll know it when the underlying economy begins to grind to a stop.  That might be happening right now as we speak, as we enter the 25th or 26th quarter of sub 3% growth, after coming out of the Great Recession.  I noticed a headline in the Financial Times on the 25th:  “Europe’s Regulatory Crackdown Set to Ease.”  Europe, where an anemic banking system, long overwhelmed by political interference, cannot support growth, is waking up to the fact that perhaps killing the patient in order to avoid it getting a cold might not be a grand idea.  Do we have to get that bad before we have that Saul of Tarsus moment?

And yet, we are still fighting the last war, we’re still fighting the perceived excess risk to which the Great Recession is broadly attributed (without, mind you, a lot of hard data to back that up).  I’m afraid that, after such a long period of anemic growth, the regulatory response to more anemic growth is more rules.  Somehow, it can be fixed with more rules, if they would just do what we told them, all would be fine.  That worked great for all those five year plans of Russia, China and much of the old Europe that were so popular throughout the middle of the twentieth century, didn’t it?

And now we have an election with the only candidates left standing all seeming to have a wildly overblown faith in the power of state action.  This is very much in accord with views of the current tenants of the political heights and it bodes more of the same.  Not comforting.  We need a break, a do over, a time out from our political class knitting away in pursuit of one or more grand theories of banking and economics, a break from this astonishing confidence that more rules will produce a better system.

It’s hard to say where we go regardless of where we go from here, except more state action, more rules, less faith in markets.  Now I’m starting to depress myself, so I’ll stop.