Free the Banks!
Jane H. Ingraham | The New American
May 17, 1993
Americans are accustomed to dismissing the statist economies of the rest of the world as being of a breed inferior to our own "free market." Yet nowhere is there a better example of statism run wild than that which controls every facet of the American banking industry. Although every American business is afflicted with the heavy hand of government regulations, these bureaucratic controls have reached an unparalleled level in the banking industry. If there remains even the slightest banking detail that has eluded the web spun by Congress, the Federal Reserve, the Treasury Department, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision, it is not intentional. This morass of laws and regulations has cost the economy and each one of us dearly, not only in outright monetary loss but especially in the unseen wealth that was never allowed to come into being. Two of the worst government-wrought debacles have been the S&L meltdown and the credit crunch, with the latter seeming to have become a permanent fixture by government regulatory decree.
Basel Accord
To trace how government brought about these unprecedented upheavals in the banking industry, let us look first at the shortage of credit that was the primary cause of the painful recession of the past three years. One of the strands of the government web takes us to the Bank for International Settlements in Basel, Switzerland, an organization composed of the top bank regulators (central bankers, finance ministers, treasury secretaries) from the industrialized nations. Led by the U.S. and assigning themselves the task of "coordinating bank supervision throughout the world" (i.e., global banking control), these powerful internationalists mandated a new regulation requiring banks to maintain (as of March 1989) a dictated ratio of capital to various risks, thus substituting arbitrary rules for market judgments. This turned out to mean 7.25 percent for business and consumer loans (increased to eight percent at the end of 1992), somewhat less for single-family mortgage loans, and none at all for government bonds.
Although critics of the Basel Accord have called it "a blunder of worldwide proportions," one sees immediately that far from being blunderers, the international bankers went straight to their purpose, which was nothing less than allocating credit to the benefit of the grotesquely spendthrift U.S. government. Since 1989, bank holdings of government bonds have increased 68 percent, while commercial and industrial loans have fallen by $53 billion. Over the past year alone, bank holdings of government securities have increased by $100 billion, while business loans have fallen by $15 billion. For the first time since 1951, banks have more government paper in their vaults than they have commercial and industrial loans. Why should a bank take the risk of making a loan -- which requires work, the salaries of lending officers, and capital allocation -- when it can wax fat by purchasing Treasury notes with no risk, no work, no expense, and no capital allocation?
Although the Basel regulations are the core of the mysterious disappearance of credit from the banks, other steps were taken to add to their impact. One of these was the incredibly irrational measure dreamed up by former Treasury Secretary Nicholas Brady, a member of the Council on Foreign Relations, that has driven many weaker banks to the wall and multiplied the credit crunch with a vengeance. Brady simply redefined what constitutes capital. Thus billions of dollars of what Treasury itself had once called capital were defined away. This phony "loss" of capital drove banks deeper into financing government debt, which requires no capital allocation, and away from their primary function of financing the business of the nation.
That is, financing the small and medium-size businesses of the nation. Large corporations are not much affected by a decline in bank lending. They simply bypass the banking system and issue more corporate bonds and commercial paper as their competition remains stalled; since adoption of the risk-based capital rules, annual issuances of securities have skyrocketed. But small businesses are trapped; they have nowhere else to turn for credit. The economic hit here is that small businesses, representing roughly half of our gross domestic product, have long been the principal source of job creation. Thus it is hardly surprising that multiple billions of our tax dollars are still flowing to the unemployed while small businesses are still getting a cold shoulder at the loan window. But there is no scarcity of money; bank assets have risen sharply this past year due partly to the all-time high disparity between loan interest charged and deposit interest given. If government had not put regulatory roadblocks in the way of commercial loans keeping pace with bank asset growth, an estimated $130 billion in additional loans would have been made, fueling an economic recovery long before now. But the Bush Administration's well-laid stranglehold on the banks prevented this, prolonged the made-in-Washington recession, and gave the radical statist from Arkansas his job in the White House.
Mandated Reserves
With another regulation that reduces available capital and feeds Goliath, the Federal Reserve requires that banks place ten percent of their demand deposits in an account with the Fed at zero interest. These mandated reserves total about $65 billion on which no interest is paid, giving the banks a loss unlike that of any other business in the world. The Federal Reserve buys government bonds with these free funds and gives the interest to the Treasury rather than to the banks that rightfully own it. This underhanded siphoning of funds through the regulatory apparatus is only one of many ways in which regulations are devastating the national economy.
Although the foregoing controls of capital brought about the credit crunch which brought about the recession, other regulatory steps went beyond drying up credit and zeroed in on those already holding it. Using the S&L collapse as an excuse, regulators created a brand new loan category called "performing nonperformers." This meant that since sectors of the economy, such as real estate, were crumbling, loans in these categories were "at risk," no matter how well serviced. Bank examiners spread out over the country, combed through bank portfolios, and trashed loans upon which no payment had ever been missed, thus causing thousands of business failures and bankruptcies.
S&L Collapse
Government policies are intended to be synergistic; one government move is often used to advance another. Thus the credit crunch was intensified through the use of that other great government-managed debacle, the S&L collapse. To understand how this collapse came about, we must go back to 1935 when FDR found a way to protect failing banks from the demands of depositors with a new kind of regulation -- federal deposit insurance. This wolf in sheep's clothing was sold to the public as protection for the "little guy"' with a top coverage of $2,500; the vilified "rich" were on their own. But once the toot was in the door, the coverage rose to $10,000, then $40,000. In 1980 it suddenly and mysteriously rose to $100,000, putting the taxpayers on the hook for what turned out to be the largest federal rescue on record, eclipsing the combined bailouts of Lockheed, Chrysler, Penn Central, and New York City. We now know that this taxpayer rip-off was engineered by former Representative Fernand St. Germain (D-RI), then chairman of the House Banking Committee, who pushed through the sudden increase in cahoots with former Senator Alan Cranston (D-CA). Although St. Germain was defeated in 1988 after accepting tens of thousands of dollars in payoffs and campaign contributions from S&L lobbyists, Cranston, a ringleader of the Keating Five, was allowed to stay on and retire at the end of the last Congress with only a reprimand. Neither congressman was ever indicted for anything or made to pay a penny into the $300 billion dollar bailout, although Charles Keating, "the most notorious figure of the thrift crisis," has been totally ruined financially by fines, is currently serving ten years on a state charge, and is facing a possible sentence of 500 years in prison from his recent federal conviction.
When Congress gave S&Ls the green light to open up with exorbitant socialized credit (public loss, private gain), regulators were breathing on their necks and were ultimately responsible for every loan made. Creatures of government almost from the beginning, S&Ls are micromanaged by bureaucrats who charter them (control competition); set minimum capitalization standards (limit the field); regulate size, location, territory to be served, services to be rendered (level the playing field); and limit the interest rates charged (applauded by the public), which guarantees that no S&L can forge ahead by profiting more for superior service. Thus, segmented markets, price fixing, entry restrictions, and protection from both outside and inside competition divorce S&Ls from any legitimate place in the market and make them wards of the government.
Yet we have not heard of a single regulator who has been called to account for what can only be gross dereliction of duty. The public's attention must be kept focused on the "greedy" bankers. To do this, $75 million in taxes have been allocated annually for the prosecution of bank officials, assuring that there will be endless prosecutions, necessary for keeping up the old refrain that stiffer regulations are needed to protect the public from crooked S&L management. Behind all this is an unequivocal message: Government intervention and planning are essential for the public welfare. As long as the public continues to buy this, power will continue to accumulate in the hands of those who intend to become our total masters.
Clinton Takes Control
The Clinton CFR/Trilateral continuum took over in January with promises to "quickly ease the regulation burden" and "clear away impediments to lending to small business." A few weeks later a Congressional Budget Office study rejected calls by small business groups urging lower capital requirements, saying this would have no effect on lending. Bill Clinton decided, on second thought, it would not be necessary to ask Congress to alter any banking laws after all; a few administrative changes would do the trick.
On March 11th, in a special White House meeting, Bill Clinton continued the charade by announcing a plan that will "pare away excessive regulations" by reducing a few property appraisal requirements and allowing bankers to request examiners to go easy on foreclosing real estate loans that are being fully serviced. House Banking Committee chairman Henry Gonzalez (D-TX), in a classic statement of socialist hubris, declared, "It will take great skill to devise ways to protect against calamity, while at the same time allowing greater discretion to lenders." Other Administration officials shook their heads over the "lack of loan demand by business," which they blamed as the reason why banks are not lending. Consumer groups warned that "relaxing regulations could threaten the soundness of the banking system." No one said a word about abolishing or even reducing the collectivist, corrupting federal deposit insurance, whereby all of us pay for the losses of some who have made certain kinds of investments of their own accord.
Then Bill Clinton got down to business. "We will not reduce attention to important regulations," he said. "The plan will not lower the capital requirement established in accordance with international standards" (Wall Street Journal, March 11, 1993).
Of course not, Bill. We understand clearly why you cannot do that.
Jane H. Ingraham | The New American
May 17, 1993
Americans are accustomed to dismissing the statist economies of the rest of the world as being of a breed inferior to our own "free market." Yet nowhere is there a better example of statism run wild than that which controls every facet of the American banking industry. Although every American business is afflicted with the heavy hand of government regulations, these bureaucratic controls have reached an unparalleled level in the banking industry. If there remains even the slightest banking detail that has eluded the web spun by Congress, the Federal Reserve, the Treasury Department, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision, it is not intentional. This morass of laws and regulations has cost the economy and each one of us dearly, not only in outright monetary loss but especially in the unseen wealth that was never allowed to come into being. Two of the worst government-wrought debacles have been the S&L meltdown and the credit crunch, with the latter seeming to have become a permanent fixture by government regulatory decree.
Basel Accord
To trace how government brought about these unprecedented upheavals in the banking industry, let us look first at the shortage of credit that was the primary cause of the painful recession of the past three years. One of the strands of the government web takes us to the Bank for International Settlements in Basel, Switzerland, an organization composed of the top bank regulators (central bankers, finance ministers, treasury secretaries) from the industrialized nations. Led by the U.S. and assigning themselves the task of "coordinating bank supervision throughout the world" (i.e., global banking control), these powerful internationalists mandated a new regulation requiring banks to maintain (as of March 1989) a dictated ratio of capital to various risks, thus substituting arbitrary rules for market judgments. This turned out to mean 7.25 percent for business and consumer loans (increased to eight percent at the end of 1992), somewhat less for single-family mortgage loans, and none at all for government bonds.
Although critics of the Basel Accord have called it "a blunder of worldwide proportions," one sees immediately that far from being blunderers, the international bankers went straight to their purpose, which was nothing less than allocating credit to the benefit of the grotesquely spendthrift U.S. government. Since 1989, bank holdings of government bonds have increased 68 percent, while commercial and industrial loans have fallen by $53 billion. Over the past year alone, bank holdings of government securities have increased by $100 billion, while business loans have fallen by $15 billion. For the first time since 1951, banks have more government paper in their vaults than they have commercial and industrial loans. Why should a bank take the risk of making a loan -- which requires work, the salaries of lending officers, and capital allocation -- when it can wax fat by purchasing Treasury notes with no risk, no work, no expense, and no capital allocation?
Although the Basel regulations are the core of the mysterious disappearance of credit from the banks, other steps were taken to add to their impact. One of these was the incredibly irrational measure dreamed up by former Treasury Secretary Nicholas Brady, a member of the Council on Foreign Relations, that has driven many weaker banks to the wall and multiplied the credit crunch with a vengeance. Brady simply redefined what constitutes capital. Thus billions of dollars of what Treasury itself had once called capital were defined away. This phony "loss" of capital drove banks deeper into financing government debt, which requires no capital allocation, and away from their primary function of financing the business of the nation.
That is, financing the small and medium-size businesses of the nation. Large corporations are not much affected by a decline in bank lending. They simply bypass the banking system and issue more corporate bonds and commercial paper as their competition remains stalled; since adoption of the risk-based capital rules, annual issuances of securities have skyrocketed. But small businesses are trapped; they have nowhere else to turn for credit. The economic hit here is that small businesses, representing roughly half of our gross domestic product, have long been the principal source of job creation. Thus it is hardly surprising that multiple billions of our tax dollars are still flowing to the unemployed while small businesses are still getting a cold shoulder at the loan window. But there is no scarcity of money; bank assets have risen sharply this past year due partly to the all-time high disparity between loan interest charged and deposit interest given. If government had not put regulatory roadblocks in the way of commercial loans keeping pace with bank asset growth, an estimated $130 billion in additional loans would have been made, fueling an economic recovery long before now. But the Bush Administration's well-laid stranglehold on the banks prevented this, prolonged the made-in-Washington recession, and gave the radical statist from Arkansas his job in the White House.
Mandated Reserves
With another regulation that reduces available capital and feeds Goliath, the Federal Reserve requires that banks place ten percent of their demand deposits in an account with the Fed at zero interest. These mandated reserves total about $65 billion on which no interest is paid, giving the banks a loss unlike that of any other business in the world. The Federal Reserve buys government bonds with these free funds and gives the interest to the Treasury rather than to the banks that rightfully own it. This underhanded siphoning of funds through the regulatory apparatus is only one of many ways in which regulations are devastating the national economy.
Although the foregoing controls of capital brought about the credit crunch which brought about the recession, other regulatory steps went beyond drying up credit and zeroed in on those already holding it. Using the S&L collapse as an excuse, regulators created a brand new loan category called "performing nonperformers." This meant that since sectors of the economy, such as real estate, were crumbling, loans in these categories were "at risk," no matter how well serviced. Bank examiners spread out over the country, combed through bank portfolios, and trashed loans upon which no payment had ever been missed, thus causing thousands of business failures and bankruptcies.
S&L Collapse
Government policies are intended to be synergistic; one government move is often used to advance another. Thus the credit crunch was intensified through the use of that other great government-managed debacle, the S&L collapse. To understand how this collapse came about, we must go back to 1935 when FDR found a way to protect failing banks from the demands of depositors with a new kind of regulation -- federal deposit insurance. This wolf in sheep's clothing was sold to the public as protection for the "little guy"' with a top coverage of $2,500; the vilified "rich" were on their own. But once the toot was in the door, the coverage rose to $10,000, then $40,000. In 1980 it suddenly and mysteriously rose to $100,000, putting the taxpayers on the hook for what turned out to be the largest federal rescue on record, eclipsing the combined bailouts of Lockheed, Chrysler, Penn Central, and New York City. We now know that this taxpayer rip-off was engineered by former Representative Fernand St. Germain (D-RI), then chairman of the House Banking Committee, who pushed through the sudden increase in cahoots with former Senator Alan Cranston (D-CA). Although St. Germain was defeated in 1988 after accepting tens of thousands of dollars in payoffs and campaign contributions from S&L lobbyists, Cranston, a ringleader of the Keating Five, was allowed to stay on and retire at the end of the last Congress with only a reprimand. Neither congressman was ever indicted for anything or made to pay a penny into the $300 billion dollar bailout, although Charles Keating, "the most notorious figure of the thrift crisis," has been totally ruined financially by fines, is currently serving ten years on a state charge, and is facing a possible sentence of 500 years in prison from his recent federal conviction.
When Congress gave S&Ls the green light to open up with exorbitant socialized credit (public loss, private gain), regulators were breathing on their necks and were ultimately responsible for every loan made. Creatures of government almost from the beginning, S&Ls are micromanaged by bureaucrats who charter them (control competition); set minimum capitalization standards (limit the field); regulate size, location, territory to be served, services to be rendered (level the playing field); and limit the interest rates charged (applauded by the public), which guarantees that no S&L can forge ahead by profiting more for superior service. Thus, segmented markets, price fixing, entry restrictions, and protection from both outside and inside competition divorce S&Ls from any legitimate place in the market and make them wards of the government.
Yet we have not heard of a single regulator who has been called to account for what can only be gross dereliction of duty. The public's attention must be kept focused on the "greedy" bankers. To do this, $75 million in taxes have been allocated annually for the prosecution of bank officials, assuring that there will be endless prosecutions, necessary for keeping up the old refrain that stiffer regulations are needed to protect the public from crooked S&L management. Behind all this is an unequivocal message: Government intervention and planning are essential for the public welfare. As long as the public continues to buy this, power will continue to accumulate in the hands of those who intend to become our total masters.
Clinton Takes Control
The Clinton CFR/Trilateral continuum took over in January with promises to "quickly ease the regulation burden" and "clear away impediments to lending to small business." A few weeks later a Congressional Budget Office study rejected calls by small business groups urging lower capital requirements, saying this would have no effect on lending. Bill Clinton decided, on second thought, it would not be necessary to ask Congress to alter any banking laws after all; a few administrative changes would do the trick.
On March 11th, in a special White House meeting, Bill Clinton continued the charade by announcing a plan that will "pare away excessive regulations" by reducing a few property appraisal requirements and allowing bankers to request examiners to go easy on foreclosing real estate loans that are being fully serviced. House Banking Committee chairman Henry Gonzalez (D-TX), in a classic statement of socialist hubris, declared, "It will take great skill to devise ways to protect against calamity, while at the same time allowing greater discretion to lenders." Other Administration officials shook their heads over the "lack of loan demand by business," which they blamed as the reason why banks are not lending. Consumer groups warned that "relaxing regulations could threaten the soundness of the banking system." No one said a word about abolishing or even reducing the collectivist, corrupting federal deposit insurance, whereby all of us pay for the losses of some who have made certain kinds of investments of their own accord.
Then Bill Clinton got down to business. "We will not reduce attention to important regulations," he said. "The plan will not lower the capital requirement established in accordance with international standards" (Wall Street Journal, March 11, 1993).
Of course not, Bill. We understand clearly why you cannot do that.
