Access to capital, credit, and financial services are fundamental to the operation of a free society. They allow for the formation, expansion, and smooth running of the enterprises that make up the private economy. They also provide room for the experimentation that allows innovation in product and service delivery. A well-functioning financial system helps match investors with enterprises for their mutual benefit, as well as the benefit of their employees and customers. When too many restrictions are placed on such a system, the economy slows both in its general flows and in innovation.
That is particularly true when a free society is strained under a crisis such as a pandemic. “Never needed” red tape that has lingered for years and sometimes decades can hinder the ability of entrepreneurs to raise funds to finance the discovery or delivery of vaccines, drugs, and medical devices. It also makes it harder for businesses to adopt new payment technologies, including cryptocurrency, or to offer new services to respond to challenging times.
In the modern global economy, access to capital generally occurs through the banking system as credit, through loans or credit cards. Once enterprises have reached a certain size, they can access capital markets, such as stock markets and debt offerings. Thanks to technological innovation, recent years have seen an explosion of alternative means of accessing capital—peer-to-peer lending, cryptocurrency, and crowdfunding prominent among them. At the household level, a variety of companies offer small-dollar loans that often help individual consumers pay the bills and keep the lights on in times of need.
The smooth running of this system was disrupted by the financial crisis. A variety of government interventions—such as the Community Reinvestment Act and the actions of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac—led lenders to overextend themselves by extending credit to a variety of borrowers who were unlikely to pay it back. Political convenience replaced sound economic judgment in capital provision decisions. A multitude of other factors added to the problem, including the following:
- The moral hazard of deposit insurance
- Zoning restrictions that fueled unsustainable housing price rises
- Problems with bank modeling of risk
- International regulation, such as the Basel Accords on the risk weighting of capital assets, that inaccurately weighted the risk faced by debt holders
In this chapter:
- Bring Accountability to the Unaccountable Consumer Financial Protection Bureau
- Oppose Regulatory Overreach in Financial Services
- Allow Financial Service Providers to Offer Consumers Innovative New Services through the Growth of FinTech, Crowdfunding, Blockchain, and Cryptocurrency
- Address “Too Big to Fail”
- Allow Banks and Credit Unions to Serve Legal Marijuana Businesses