America's ability to provide economic leadership - whether as an advocate for economic liberty or as an architect of concerted economic liberty or as an architect of concerted economic action - must be built on a firm domestic foundation. If America is to lead abroad, our starting point has to be competitive industries and a dynamic society.
In the area of financial services, young Americans are demanding a more competitive, market-responsive system.The 1930s banking legislation stifled competition, both geographic and product, for the sake of supposed stability. The establishment and preservation of local monopolies and oligopolies almost ensured profitability. Exit from the marketplace was exceedingly rare. But the security created was a false one - only good as long as the banks could be insulated from market change and as long as their narrow lending base remained prosperous.
To the degree the banks cared about customers, they usually courted business borrowers. Government regulation severely constrained banks' ability to respond to the needs of small savers, even when banks wanted to. There were mandated ceilings on savings rates. Even today, banks may not pay interest on checking accounts.
As one might expect, the depositories were not in the forefront of marketing, product and service development, or innovation. They weren't subject to competitive pressure to become more efficient.
Then the game changed. Some depositories began to challenge the geographic preserves of others. High inflation blew the lid off interest rate ceilings. New competitors from thesecurities world began to offer the same services as banks at better prices. Formerly illiquid credit - commercial loans, mortgages, car loans, consumer receivables - have been packaged and sold in the capital markets.
Advances in communications and information management made it possible to channel capital, create liquid markets and analyze investment relationships in ways unthought of not long ago. Loans became commodities, and the economies of scale were transformed drastically.
Serving the consumer became a profitable business. So it attracted business. General Motors Acceptance Corp. is the largest mortgage servicer in the United States. An active secondary market in home mortgages moves billions of dollars around the nation, reducing and equalizing rates in an efficient manner. And the retailers have seen an opportunity to apply their marketing skills to serve customers long ignored by traditional depository institutions.
The new entrants are trying various strategies. Some companies are creating financial supermarkets, offering one-stop service for a variety of needs. Others specialize in low cost, no frills service - for example the discount brokers and mail order mutual funds. Still others are experimenting with cross-marketing and attractive packages of products.
The consumer welcomes this competition and innovation. It accords with needs of all working people:
* They prefer lower rates on their mortgages and a greater selection of mortgage types to paying an extra price to a familiar but not necessarily friendly local lender. (And filling out the forms in the privacy of your home after making contact by phone and mail isn't so bad either.)
* They like to have consumer banks or other companies offering special service or better terms for their credit card and transaction business - especially if there is full disclosure of pertinent information.
* If they have some money to save, they'd like to have a financial adviser to consult about the range of suitable investments. Most don't expect the big capitalist score, but they do need savings to send their children to college and they deserve a comfortable retirement. A little extra money saved or earned on other money will enable them to splurge now and then on leisure activities.
* They want the right insurance against the calamities that can destroy all that they have achieved.
* Just as important perhaps, all of us like the psychological rewards of being sought after as investors.
Some financial industry executives have caught on. They realize that they not only face a new competitive world at home, but they're losing ground abroad. According to a 1986 survey, only one U.S. bank is among the 10 largest in the world, based on total deposits. Japan has the largest, and seven of the 10 largest. The other two are French. Thirty years ago, by comparison, five of the top 10 banks were American, including the top three.
If banks cannot evolve, the term "counting house" industry may before long become an epitaph like "smokestack" or "rust bowl." This trend is still hard for many people to accept, schooled as we have been by banking's historical image of affluence and influence.
But note my warning: If Congress applies the "protectionist" model by trying to repair the crumbling walls of financial oligopolies, the marketplace, technology and consumer tastes will move beyond. The victim would be one more U.S. industry that would not - or in this case could not - evolve to meet the competition.
Yet I am hopeful. Many new congressmen, and some of their seniors, know it's time to change. They can see that the old system needs a drastic overhaul.
New ideas are pouring out - about more expansive financial services holding companies, for example. And other people are recognizing that it makes sense to permit anyone to own a bank - as long as the insured deposits, the payments system and the connections to owners are regulated in a common fashion.
It's time for a change. America needs to reassert itself on the leading edge of the financial services world. We've got the ability. We've got the motivation to do it. And we certainly have good reason to do it if we want to be internationally competitive.