Stop the Feeding Frenzy

I have never written what I would term "political" article before.  I stick to the business of banking, which I love.  However, this Saturday morning I made a fatal mistake:  I read the NYTimes business section.  Joe Nocera's article about banking caught my eye.  I read and saw red; so much so that I can't remain silent anymore.  I am stunned by how little the media understands our industry and its role in the health and welfare of the US economy.  It's time to write something about Banking 101.  Alternatively, read the huge textbook, "Financial Institutions", which I used to teach second year MBAs at UC Davis.  It speaks for itself, even if it's dated.


The sentence that finally broke the camel's back was:  "Are banks...assuming a little bit of responsibility or at least self discipline to do what is right for the country and not only for their bottom line?"  Or, as the article continues, what are the banks' obligations to their fellow citizens?


I hardly know where to start when I read such socialistic rhetoric.  Did we forget what made our country great in the first place?  Do we not realize that other economic systems have failed time and time again?  Just go to Russia or China (the most recent favored candidate for a global economic powerhouse).  See the lack of light and hope in people's eyes; the crumbling buildings everywhere; the results of decades of political corruption and absolute power.  See the absence of small business capitalism everywhere.  The government giveth everything and it also taketh away, based upon considerations that have little to do with free market or with citizens' welfare.


What I found missing in these and other, well developed countries, is the great financial system that we were fortunate enough to develop in America.  We have great distribution of financial power, since we have more banks than any country in the world.  Some say it brings inefficiencies to our system and impedes our competitiveness on the global scene.  I say, we have become the single most efficient economy in collecting unused funds from pockets where they accumulate but have no place to be deployed, to be put to work in places where they are needed.  Our small banks are extremely efficient in collecting deposits from their communities and re-investing them in those very same communities.  But when the local market can't absorb all the available deposits, they get shipped, often in the form of Fed funds, to those locales where demand for credit is greater, and get invested where they do the most good. 


Admittedly, this is an idealistic view.  Our system is far from optimal.  But it's the very best financial system on the planet.


So, my first comment is:  Don't knock the US financial system.  It works and has brought us to where we are today: still the greatest nation and economic power on earth, albeit an ailing one.


I also want to acknowledge that the system has flaws, that it has been abused, that regulatory gaps and capitalistic greed brought us to our knees.  But let's not throw the baby out with the bathwater:  the US financial system works.  Also, let's not suffocate it with over-reacting regulatory constraints that will strangle the flow of funds that is at the core of our strength.


Secondly, the financial instruments so many condemn today started as a fantastic financial innovation in the '80s.  They facilitated huge economic growth by freeing banks' balance sheets to make more loans and offer credit to less credit worthy borrowers, both individuals and companies.  Through corruption and criminal activities (remember Mike Milken?) new markets and liquidity outlets were created that enabled depository institutions to grow their loans many times beyond their balance sheet capacity by selling them into newly created financial markets (securitization).  Our economy (and others') enjoyed the fruits of this innovation for 30 years.  Now, after much abuse in those instruments, we are retrenching, appropriately.  But, again, let's not forget the value that has been created and is yet to be created by opening up banks' balance sheet to generate more credit for our economy.


Individual corruption is beyond galling.  It often prompts, unfortunately, regulatory and legislative over-reaction that has many negative side effects which countermand their original intent.   Our entire country (and others) understandably wants to find someone to blame for the current economic debacle, and banks are at the center of the storm.  Let's not even mention that not all banks are the same (there are huge differences between investment banks and commercial banks; hedge funds and money market funds; etc.).  At the same time, enlightened self-interest should be the basis for corporate decision making, and it is at the core of capitalistic thinking.


As we move forward, I hope our legislators and industry observers will remember for the following:
  • While the bank bashing continues, let's be careful not to damage the supremely strong foundation of our financial system that is at the core of the United States' strength, in our zeal to punish the guilty parties.

  • Also, let's not paint all 9,000+ depository institutions with one broad brush, as we have been doing for quite some time.  Most community banks and many of the nation's mega-banks are an integral part of their local economy and contribute to its success daily.

  • Let's not forget the millions of bank shareholders who have enjoyed the fruits of their investment in the past, by asking banks to become more socially minded and neglect those shareholders (i.e. retirees, pensioners, pension funds, Joe the Plumber, you and me).

  • Economic recessions are painful.  They are not always preventable.  As we work toward economic recovery, we should be careful not to mistake mid-course corrections with total system overhauls.  We are still the greatest nation and economic power in the world.  Shaking our very foundation is a threat to our global position today and tomorrow.

Banks, by their very nature, are inseparable from the economies they serve.  They are an integral part of the country's financial strength.  As we lick our wounds and work so hard to climb out of this unprecedented economic strife, let's remember the fundamentals.