Regulation typically results in effects opposite to those intended, causing social harms (Peláez and Peláez, Globalization and the State: I, 143-7). The Banking Act of 1933 (12 U.S.C. § 371a) prohibited payment of interest on demand deposits and imposed limits on interest rates paid on time deposits issued by commercial banks implemented by Regulation Q (12 C.F.R. 217) (Peláez and Peláez, Financial Regulation after the Global Recession, 57). This depression rush to regulation was motivated by the erroneous belief that banks provided high-rate risky loans to pay high competitive market interest rates on deposits, which allegedly caused banking panics in the 1930s. An added motivation was the allocation of savings to housing by maintaining low interest rate ceilings benefitting savings banks and savings and loan associations that complained of unfair competition from higher deposit rates of commercial banks. Milton Friedman analyzed in 1970 that the rise of inflation above Regulation Q interest rate ceilings caused halving of issuance of certificates of deposit (CD), which was the banking innovation created to finance rising loan volumes. Banks accounted higher-rate CDs in their European offices as "due from head office" while the head office changed the liability to "due to foreign branches" instead of "due on CDs." Friedman predicted the future as revealing as his forecast of 1970's stagflation: "the banks have been forced into costly structural readjustments, the European banking system has been given an unnecessary competitive advantage, and London has been artificially strengthened as a financial center at the expense of New York." People of modest means with lower income and wealth having no alternatives other than bankbook accounts received rates on their savings below those that would prevail in freer markets. Regulation transferred income from poorer depositors to endow banks with market power. The financial system was forced into costly readjustments while highly-paid financial jobs and economic activity were exported to foreign countries. The interest rate is the main compass of allocating savings and capital in a market economy but it was distorted by ill-conceived Great Depression regulation that is still emulated currently. The approach of official prudential supervision and regulation (OPSR) blames the irresponsibility of banks for the current financial crisis/global recession. OPSR proposes intrusive new regulation with powers to control business decisions at banks in executive remuneration, capital, liquidity, transactions, portfolio choice and others as if regulators are superior business executives (Pelaez and Peláez, Financial Regulation after the Global Recession, Regulation of Banks and Finance). The effects of laws are reversed by preemptive decisions as proved again by the Credit Card Accountability, Responsibility and Disclosure Act (CARD). By anticipated increasing costs and risks of credit card issuers resulting from CARD before going in effect in February 2010 nine months after its enactment in May 2009, CARD is causing higher fees and tighter credit conditions irrespective of creditworthiness. This will likely be the unintended potential consequence of proposed stiff regulation of consumer credit when consumers are reducing expenditures required for recovery. Frustrating securitization and structured products would have consequences similar to Regulation Q: higher costs to banks partly passed on to all but especially low-income consumers in the form of higher rates, lower financing volume, tighter credit conditions and flight of finance and high-pay jobs away from the United States. New York could decay to the perilous condition during the 1960s. Excessive regulation could create major social losses. Sound weights for prosperity and stability should be used in regulation, avoiding frustration of financial innovation that could restrict future growth and prosperity.


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