Liddick: Financial daydreaming
So the chairman of the Federal Reserve thinks the government should get busy and rescue the economy, chop-chop. How, exactly, he’s a little less clear about. But he’s very emphatic that, should there be another sharp downturn, it won’t be his fault. The president agrees: it’s not his fault, either. Republicans in congress? They didn’t do it. Democrats? Nope. Them either. Just ask ’em; they’ll tell you – at some length, too …
To pull the curtain back just a tad and have a look at what’s behind this kabuki drama, one could do worse than to pay attention to Mr. Jay Davidson, founder and chief executive of First American State Bank in Greenwood Village, who testified recently before the U.S. House Small Business Subcommittee on investigations, oversight and regulations about the impact new banking regulations have had on lending by institutions such as his.
Mr. Davidson noted that business lending in Colorado is down substantially; lending to small businesses is especially reduced. This echoes a nationwide trend among both banks and businesses, which has become fashionable to criticize in some circles as “hoarding cash.” It is nothing of the sort.
As Mr. Davidson’s colleague David Brown, president of Southeast Denver Centennial Bank testified, the lending slowdown can be traced to higher capital requirements stipulated by the new consumer financial protection bureau, brought to us by – among others ± our old friends Sen. Chris Dodd and Rep. Barney Frank. To anyone familiar with the central role these two played in the run up to the 2007 collapse of the U.S. housing market, this is bitter irony indeed.
Briefly, these two gentlemen and their similarly minded associates amended, tweaked and squeezed the Community Reinvestment Act of 1977 into a fiscal Frankenstein’s monster, through which billions of dollars of federally guaranteed loans were made to people without any evidence of an ability to pay, all in service to federal regulations that pressed banks to be ever-more attentive to “non-traditional borrowers.” Be sure a political goal was involved, here.
The dynamic duo had help, including the occasional nod from former President Bush and a few bankers who saw they could avoid the cost of putting ATM machines in low-traffic rural areas by making more loans to people regulators labeled “under-served.” And the Federal Reserve, whose policies pushed interest rates to lows not seen for decades, helping to stimulate a rush to sever equity in housing through refinancing. If you had a pulse you could get a mortgage, at historically low rates. Are you listening, Mr. Chairman?
When it turned out there was a jolly good reason many of the new noteholders didn’t get much attention previously – namely, an utter inability to pay their debts, well … it seemed such a good idea at the time. After all, isn’t that what the government is supposed to do? Help people?
Not when it’s helping them into a life of penury, it’s not.
But when you’re one of the architects of a monumental failure like this, you shrug your shoulders and march on. There are more financial civil rights to discover, from which political benefit can be spun. And if anyone questions the wisdom of what you’ve done, just blame the whole mess on “greedy bankers” or “Wall Street.” If you’re lucky, the crash will even help justify another layer of regulation. It worked so well the last time around …
Problem is, regulations serving political purposes will add to the rot eating away at our economic system, not rescue it. Demanding higher cash reserves and more stringent standards is a fine political pose, but it will lead to less lending, not more – strengthening the recession’s bite. And those pushing for the new standards understand this full well, or they are dull beyond calculation.
As Mr. Davidson noted, it is now very difficult for banks to raise additional capital, so banks have few choices when responding to new regulations other than to reduce their exposure. Notwithstanding calculations showing a loan is low risk with high probability of positive impact to ongoing business, it will not be made; new banking regulation forbid it. There will be negative economic effects, but as both men pointed out to the subcommittee, bankers are now calculating according to regulations, not business models.
This is not merely an intellectual exercise. Those following business news might have noted that Colorado is close to leading the nation in bank failures – we’re number five, to be exact. Growth is anemic, business lending is down. Will we be able to put the doldrums in the rear-view mirror anytime soon?
Not if Barney Frank and friends have their way. They’re perfectly willing to smash the system in order to save it – and you in the process.
I feel safer already.
Summit County resident Morgan Liddick pens a Tuesday column. E-mail him at email@example.com.
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