The Next Bankingcrisis; The Issue Who's Name They Dare Not Speak

                       The Next Banking Crisis: 
              ========================================= 
              The Issue Whose Name They Dare Not Speak. 
              ========================================= 

    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. 
 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
    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 
 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 
    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: 
              ========================================= 
              The Issue Whose Name They Dare Not Speak. 
              ========================================= 
           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. 

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Doug Henwood is Editor of _Left Business Observer_ (see below) 
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