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The Next Banking Crisis:
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The Issue Whose Name They Dare Not Speak.
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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.
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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
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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:
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The Issue Whose Name They Dare Not Speak.
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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 1,000 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.