The Next Banking Crisis: ========================================= The Issue Whose Name They Dare Not Speak. =========================================
Late in June, [the Bush] Administration unleashed a bill that would gut the Community Reinvestment Act (which requires banks to make loans in their own neighborhoods, including low-income areas), ease restrictions on loans to a bank's own officers and directors and postpone the effective date of some tighter regulations contained in last year's banking law. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - This proposal is only the latest in a series of deregulatory gestures by the Administration and the Fed. [whose] gifts to the financial industry -- [recently] forty-five actions, taken rather quietly since December [..] mandate looser capital requirements, lighter supervision and gimmicky accounting. Their collective effect is to make the banking industry look healthier than it really is and to permit riskier behavior in the future. These moves defer tomorrow's disasters - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - The CBO estimates that the repeated delays in shutting down insolvent institutions from 1980 to 1991 added $66 billion to the cost of the S&L bailout -- enough to fund the Aid to Families with Dependent Children program for three years, or AIDS research for 50
The Next Banking Crisis: ========================================= The Issue Whose Name They Dare Not Speak. ========================================= By Doug Henwood, _The Nation_, July 20/27, 1992 (See below for more about _The Nation_)
Transcribed by Joseph Woodard
Whatever happened to the financial crisis? Only a year ago, it seemed the credit system was imploding, and ever-more-extravagant bailouts appeared inevitable. Now, the Resolution Trust Corporation (R.T.C.), liquidator of failed savings and loans, is winding down operations; banks and surviving thrifts seem generally profitable; and the seizure of failing institutions has all but ceased. Surely the weak, possibly failing, economic recovery we've seen since late last year can't be solely responsible for this apparent reversal of fortune.
No, finance owes its recovery mainly to an indulgent government, whose normal generosity has been deepened by election year concerns. The Bush Administration wants to bury the problem, Congress is happy to go along and the media aren't asking any unpleasant questions. Clinton raises the issue with his typical technocratic dullness, and Perot with his usual empty fury -- but neither has made that big a deal of the timely disappearance of the financial crisis. That's odd, considering that, as Bush campaign officials told Lynda Edwards of _The Village Voice_, people in their focus groups are obsessed with the savings and loan bailout and wonder why the press isn't covering it.
One reason the banking mess has receded from view is that the Federal Reserve -- which no doubt prefers that the financial system never be an electoral issue at all -- has been easing policy gradually but steadily since March 1989. The federal funds rate (the interest rate banks charge one another for overnight loans), the most sensitive indicator of the central bank's policy, has fallen in thirty-two of the past forty months, pushing short-term interest rates to their lowest levels since 1963.
Although the economy has barely responded to this treatment -- no modern slump has proved so resistant to lowered rates -- it has helped refloat the banking system in at least two ways. First, banks haven't really shared the Fed's generosity with their customers. Rates charged for loans haven't declined anywhere near as much as those paid on deposits, boosting bank profits. And second, long-term rates haven't declined nearly as much as short-term rates. Leaving aside two brief spikes in the 1950s, the gap between long-and short-term rates is the widest it's been since the dislocations of the 1930s and 1940s. This also fattens the banks, which have been buying government bonds (rather than making loans) and pocketing the large spread between what they pay their depositors and what they can get from Uncle Sam. Should the relation between long-term and short-term rates return to normal, the banks would take a quick turn for the worse.
Fed chairman Alan Greenspan isn't the banks' only friend. The other is the man who has said he will do anything to get re-elected, George Bush. Late in June, his Administration unleashed a bill that would gut the Community Reinvestment Act (which requires banks to make loans in their own neighborhoods, including low-income areas), ease restrictions on loans to a bank's own officers and directors and postpone the effective date of some tighter regulations contained in last year's banking law.
This proposal is only the latest in a series of deregulatory gestures by the Administration and the Fed. The Durham, North Carolina-based Financial Democracy Campaign recently issued a five-page list of such gifts to the financial industry -- forty-five actions, taken rather quietly since December, that mandate looser capital requirements, lighter supervision and gimmicky accounting. Their collective effect is to make the banking industry look healthier than it really is and to permit riskier behavior in the future.
These moves defer tomorrow's disasters, shoring up shaky banks (more than 1000 are on the F.D.l.C.'s problem list); yesterday's disasters are being dealt with separately. The government has virtually stopped seizing failed banks and thrifts; the liquidators can only move in when ordered to by Administration agencies (the Office of Thrift Supervision and the Comptroller of the Currency, both fiefdoms within Nicholas Brady's Treasury Department), and such orders aren't being given. This is good news for the liquidators, since their insurance funds are broke, and Congress is reluctant to vote them more money -- at least not in an election year.
If you listen to the R.T.C., its work is nearly done. Even though it has run through only half its budget, the corporation is shutting offices and reducing staff. Among the staff being reduced, as Susan Schmidt has been reporting in _The Washington Post_, are lawyers with the professional liability section, who are supposed to be going after the executives and board members who ran the thrift industry into the ground. With a three-year statute of limitations (running from the moment institutions are seized), the division needs more staff, not less -- but the R.T.C. is dismissing experienced lawyers and replacing them with novices. No one can prove anything yet, of course, but the likely targets of such liability investigations, aside from bankers, would be realtors, accountants, lawyers, doctors and others who are likely to be generous campaign contributors to both parties.
Insofar as there's a strategy behind this delay in dealing with the banking problem (aside from political expediency), it's one of "forbearance" -- the hope that the problem will just go away with time and economic growth. But the economy is hardly growing, and insolvency isn't one of the diseases that time can cure. The Congressional Budget Office estimates that the repeated delays in shutting down insolvent institutions from 1980 to 1991 added $66 billion to the cost of the S&L bailout -- enough to fund the Aid to Families with Dependent Children program for three years, or AIDS research for fifty.
Students of the S&L disaster are reminded of 1988, when the same trio of co-conspirators -- the executive and legislative branches, assisted by a lazy or complicit media -- ignored the disaster until after the election. In early 1989, the thrift crisis was suddenly "discovered," only to disappear again in accordance with the quadrennial cycle.
But the problems won't just go away. Bank and thrift balance sheets are contaminated with billions of dollars of loans that went to build pointless shopping centers and see-through office buildings. Salomon Brothers estimates that it will take a national average of twelve years to fill up existing empty commercial real estate -- ten years in Los Angeles, twenty-six years in Boston, forty-six years in New York City and fifty-six years in San Antonio, the national champ.
Aside from increasing the ultimate cost of the financial rescue, the conspiracy of silence has largely prevented any serious discussion of why the financial meltdown happened or how we might make the best of the situation. The government is spending hundreds of billions of public dollars to restore business as usual. Instead, failed institutions could be transformed to publicly or cooperatively owned local development banks, and the government's vast inventory of near-worthless real estate could be turned over to community groups, local governments or nonprofit associations for creative use. But some things are too important to be discussed openly, especially during election season.
************************************************************** Doug Henwood is Editor of _Left Business Observer_ (see below) **************************************************************
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