Banks and Toasters

Paul Krugman has a good op-ed today on the problems facing the financial industry. This one paragraph caught my attention:

The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.

He’s right. Banking has changed dramatically over the last 30 years. But that Golden Age wasn’t so golden. The reason banks offered toasters to new accounts wasn’t due to bad marketing, but due to outdated regulations. That’s the only way they could pass cost savings on to depositors.
Free toasters from banks weren’t some happy relic of a bygone era, they were the one of reasons why the modern financial world came about. Interest rates were regulated and you couldn’t even pay interest on a checking account. Also, bank locations were far less convenient to today’s world with ubiquitous ATMs.
Let’s not fool ourselves into thinking the past was better than it was. I think it’s much better for banks to be in the banking industry rather than the household appliance industry.

Posted by on March 27th, 2009 at 9:18 am


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