Slow Learners

The Liberal Ideologues Cannot Help Themselves

The Proverb says, "A hundred blows on the back of a fool makes no impression; but a word to the wise is sufficient."

We and many others have written on how welfare-rights-entitlement ideologies were at root substantially responsible for the banking crisis in the US (and, due to financial disintermediation and securitisation subsequently, a global problem.) The morally bankrupt idea that the poor had an entitlement right to own their own homes led to Congress led policies which forced banks to lower lending standards and grant mortgages to people who had little or no hope of servicing them.

This has resulted in a large number of mortgages being defaulted upon, which has brought great strain to US and international banks. So the US government, marshalling its ability to spend, has loaned billions and billions of dollars to banks to shore up their balance sheets, compensating them for all their mortgage assets which have gone sour. If banks don't have sufficient capital, they cannot continue to lend. Even creditworthy and sound lending opportunities then cannot find capital, leading to a rapid contraction in business in almost every place. So far, so good.

But now, we are told, the welfare-entitlement-rights folk in Congress and the Obama administration have decided to have another crack at forcing banks to engage and continue in bad lending. The basic rationale is the same as that which promulgated the crisis in the first place. It is the belief and assertion that people--especially poor people--are entitled to own a home. Therefore, Congress has decided it is going to tell banks how to do business, if they accepted Federal money. They must keep lending to insolvent, bankrupt, poor people who cannot service the loans which they should never have been given in the first place.

We have heard plenty about executive bonuses, salaries, fat-cat spending etc. etc. Congress has railed against such misuses of government money. So, according to the Herald Tribune, Congress has put rules in place to prohibit such excesses. But it has also began to instruct banks not to foreclose upon and evict people in default of their mortgage commitments.

U.S. financial institutions that are getting government bailout funds have been told to put off evictions and modify mortgages for distressed homeowners. They must let shareholders vote on executive pay packages. They must lower dividends, cancel employee training and morale-boosting exercises, and withdraw job offers to foreign citizens.

As public outrage swells over the rapidly growing cost of bailing out financial institutions, the administration of President Barack Obama and lawmakers are attaching more and more strings to rescue funds. Some experts say the conditions are necessary to prevent Wall Street executives from paying lavish bonuses and buying corporate jets, but others say the conditions go beyond protecting taxpayers and border on social engineering.

Thus, banks are now being forced, once again, to engage and maintain bad credit lending. The result: weak banks are being forced to continue bad lending practices which will have the effect of making them weaker still, leading to more and more bank defaults (or more bank bailouts)over time.

A growing chorus of industry experts is warning that asking weak banks to carry out the government's economic and social policies could increase the drain on the public purse. These experts say that the financial assistance, while helpful in the short run, could require weak banks to engage in lending practices that will lose them even more money, and that the government inevitably will become more heavily involved in dictating how banks do their business.

In other words, government policy is now forcing banks to increase their risks, not reduce them. Risky lending. We thought that Congress and the Obama administration believed that banks excessive risk taking was the cause of the problem. Now they are requiring federally assisted banks to become even more reckless. But, hold on, it's OK, because the poor are having their entitlement rights served. And that has been the cause of the problem all along.

It the fool will not learn, no matter how many adversities are visited upon his hapless head. Rights based ideologues and zealots are fools. They will continue to follow policies that bring devastation and destruction right through the community because they are blinded by their idolatry and ideology. Welcome to Athens!

But it is not all bad. The smart, stronger banks have woken up. They have decided to give the Federal money back.

Some bankers say the conditions have become so onerous that they want to give the bailout money back. The list includes small banks like TCF Financial of Wayzata, Minnesota, and Iberiabank of Lafayette, Louisiana, as well as giants like Goldman Sachs, Wells Fargo and U.S. Bank in San Francisco. They say they plan to return the money as quickly as possible, or as soon as regulators set up a process to accept the repayments.

Wells Fargo has been a very successful bank over a long time. Their decision is significant. These are the institutions which are fundamentally sound and are likely to go from strength to strength in the current environment. What is likely to happen is the bank sector in the US will be split into two: those banks which are sound and which have decided to have nothing to do with the Federal government's blood money; and those which have accepted it and are are becoming weaker by the day as the government forces them to engage in more and more risky commercial behaviour.

The policies of the Congress and Obama administration will probably be judged by history to have been the biggest single cause of the destruction of the banking system in the first decade of this century. But that's what fools do. An ironic development is likely to be that banks which accept federal bailouts will be branded as weak, near insolvent, and to be avoided like the plague. So much for a federal bailout: it will turn out to be a Judas kiss. We recall the sage words of Ronald Reagan: the most terrifying words in the English language are, "I am from the Federal Government and I'm here to help you."

We leave the closing word to one smart banker.

C.R. Cloutier, the president of MidSouth Bank of Lafayette, Louisiana, and a survivor of the savings and loan debacle, said that his institution accepted $20 million from the rescue fund because he and his board believed it was patriotic and would help them offer loans during a recession. But faced with what he says is an unwarranted stigma of participating in the program, as well as the new restrictions that are imposed on banks taking the money, he is now considering whether to return the money, as other institutions have sought to do.

"Two things you learn in the banking business," Cloutier said. "The first is concentration is bad. We now have 64 percent of deposits in eight institutions. The second rule is your first loss is your best loss. Get it over with. Don't pump water in a dead fish."

Indeed. Now there is a wise man for whom a mere word is sufficient.