In Defense of the Banks

The title probably makes the blood pressure go up for quite a few people. The banks after all are the villains that brought our economy down, and that is undoubtedly true.

But it overlooks one cogent and vital point and that is the nature of our capitalist system. Now some of my audience may react that this is exactly why we need to get rid of the capitalist system, but I say to them, nobody has as yet come up with a better one. China, India, the USSR and a number of other countries have tried planned economies, and all they got were shortages, a low standard of living, and more poverty than any capitalist system has ever seen.

So as far as I am concerned I am for a capitalist system, or more accurately, a mixed economy with regulations that prevent inappropriate risk taking, and unethical behavior. Regulations have been the US model going back long before Roosevelt’s New Deal, and as least as early as 1890, when the Sherman Anti-Trust Act was enacted. A mixed economy goes back to the founding of the Republic, when the Constitution mandated that certain businesses, such as the delivery of the mail shall be a government function. Since then the US government has taken on innumerable business functions, from building canals, to land grants, to subsidizing the railroads, building highways, developing a widely envied (at least it used to be) public education system, establishing our National Parks, creating unemployment insurance, Health Insurance in the Medicare, Medicaid, CHIP, and VA programs and Social Security, to name just a few.

But why would I defend the banks? Well, they did what all businesses do in a capitalist system. They try to make as much money as they can, and that is what the banks did. So where was their fault. They used overly risky, ill considered and even unethical means toward their end of maximizing profits. But as long as what they did was not illegal, they did nothing wrong under our system of laws or even ethics.

Some, particularly in Republican circles, joined to some degree by left wing organizations, such as moveon.org, decried the bank bailout, and felt that they should reap the consequences of their reckless behavior. On a level of pure theory they are right, but we live in a real world, and the consequences of a melt down of our banking system would have had disastrous consequences for the whole economy, indeed the whole world. The failure to save Lehman brothers, which shook the economy, gives some indication of the abyss, which we were facing. Let us remember that F.D.R. dealt first with the banking crisis when he was inaugurated and despite unprecedented actions still had a 22% unemployment rate after 5 years in office.

In my opinion the fault lay in a misconceived believe that the capitalist system is self-regulating. Some, despite all evidence to the contrary, still believe that. Fortunately, many, among them the great apostle against regulation, the former Chairman of the Fed, Alan Greenspan, have recognized that they were wrong, or as the conservative British newspaper, the Guardian, said:

“… Alan Greenspan has conceded that the global financial crisis has exposed a "mistake" in the free market ideology that guided his 18-year stewardship of US monetary policy.

“A long-time cheerleader for deregulation, Greenspan admitted to a congressional committee yesterday that he had been "partially wrong" in his hands-off approach towards the banking industry and that the credit crunch had left him in a state of shocked disbelief.”

Even former President Bush, in his last year in office recognized the crisis and urged a bailout of the banks which was authorized by the Congress in a display of bipartisanship not seen since, with both Presidential candidates, McCain and Obama, voting for it along with a majority of Democrats, and a minority of Republicans, who clinging to their faith that the markets would right themselves, were willing to risk a total meltdown in pursuit of their ideology, and now oppose regulating the banks, having learned nothing from this crisis, or for that matter earlier crisis, and the people who through their votes support such irresponsible behavior.

We now see similar behavior from the Toyota company who resisted recalls and an emphasis on safety for fear that it would have a negative effect on their bottom line and we saw it during the Savings and Loan crisis of the ‘80s and ’90 which like this crisis was caused by the removal of regulations that until then prevented the calamity and would have prevented it had they remained in force, or as About.com explained it:

“Savings and Loans were specialized banks that used low-interest, but Federally-insured, deposits in savings accounts to fund mortgages. In the 1980's, the popularity of money market accounts reduced the attractiveness of savings accounts, so the banks asked Congress to remove restrictions. In 1982, the Garn-St. Germain Depository Institutions Act was passed, which allowed S&L's to raise interest rates on deposits, make commercial and consumer loans, and removed restrictions on loan-to-value ratios. At the same time, the Federal Home Loan Bank Board regulatory staff was reduced thanks to budget cuts.

“In an attempt to raise capital, banks invested in speculative real estate and commercial loans. Between 1982 and 1985, these assets increased 56%. In Texas, 40 S&L's tripled in size, some growing 100% each year.

“By 1983, 35% of the country's S&L's weren't profitable, and 9% were technically bankrupt. As banks went under, the state and Federal insurance began to run out of the money needed to refund depositors. However, S&L's kept remained open, making bad loans, and the losses kept mounting.”

Unfortunately, the lessons of that crisis were not learned, particularly since that too resulted in an essential bailout under a Republican Administration. Or as About.com puts it:

“By 1989, Congress and the president knew they needed to bail out the industry agreed on a taxpayer-financed bailout measure known as the FIRREA provided $50 billion to close failed banks and stop further losses. It set up a new government agency called the Resolution Trust Corporation (RTC) to resell Savings and Loan assets, and use the proceeds to pay back depositors. FIRREA also changed Savings and Loan regulations to help prevent further poor investments and fraud.”

But why any of this should be a surprise is difficult to fathom. Sport analogies are so very popular in our culture, and here there is one that is at much on point as any could be. Our capitalist system works on competition. Competition is the heart and soul of sports. But can anyone imagine sports without regulations and umpires to enforce them. With the Super Bowl just behind us, can anyone imagine that game without rules, among them unnecessary roughness, holding or other tactics considered unfair.

          The President has introduced legislation that would begin to repair this situation. The banks and their protectors in the Republican Party want to block these. They are essential if we are to avoid endless repetition, but even they are not enough. We need to once again separate investment from commercial banking, by reenacting the Glass-Steagall Act, as ably set forth by Thomas Frank in the Wall Street Journal: We need to cap usurious interest rates, whether disguised as fees, or in the form of charging interest for a month when the loan is in fact for a day.

          The idea that competition, the heart and soul of our capitalist system, can function without regulations and strict enforcement should by now be self-evident. The villain is not the banks, but the government that fails to set up regulations, the agencies that fail to enforce them, and the people who through their vote create such a government.