Thursday, April 30, 2009

The Continuing Assault on Prudent Banking

On October 6, 2008…as the full, calamitous scope of the housing bubble-induced financial crisis was just beginning to emerge…I exposed its fundamental source. Referring to the popular movie classic It’s a Wonderful Life, I wrote:

The message of the movie is to attack the prudent, profit-seeking banker. It [the movie’s theme] is a symbol of the unjust tarring of what is, in essence, a highly virtuous lending doctrine…that neither need nor desire constitute valid criterion for extending credit. We see now the results of policies that are designed to invert that principle.

For decades, George Bailey has ruled the corridors of power in Washington. Primarily through the policies of the liberal democratic party of Franklin D. Roosevelt, a whole network of government policies and regulatory actions evolved for the express purpose of turning the entire U.S. banking system into a giant Bailey Building and Loan Association. Prudent, resistant lenders were increasingly cajoled, pressured, threatened, and placed at a competitive disadvantage as the charlatans and quick-buck artists (borrowers included) rose to dominance in the industry…unleashed by the pressure and with the blessing of the political altruists.

That government intervention grew out of the conviction by politicians and much of the public that the selfish pursuit of profitable lending did not “serve” those who could not afford a home and, thus, lenders should be made to act in defiance of their long-term best interests.

To be sure, there are banks that did resist “the pressures and temptations of the moment” and adhered to sound lending standards despite being at a competitive disadvantage for a time. But the quick-buck artists who rose up through some of America’s great financial powerhouses to overwhelm those prudent folks who would resist those temptations are as much victims as they are villains. They were turned loose and given the blessing of their own government.

C.S. Lewis once wrote:

“Of all tyrannies, a tyranny sincerely exercised for the good of its victims may be the most oppressive. [T]hose who torment us for our own good will torment us without end for they do so with the approval of their own conscience.”

What dominates the conscience of our tormenters is altruism, the fundamental source of the financial crisis. While the remnants of our constitution get shredded in the rampaging lawlessness of what George F. Will calls our “capricious and increasingly anti-constitutional government", George Bailey goes on wreaking havoc.

But politicians of both parties steadfastly refuse to reevaluate and question the network of housing and credit policies and the underlying moral root that are a prime cause of the crisis. Instead, the primary culprits…the liberal democrats…race ahead with a breathtaking and far-reaching expansion of statist control of our economy. The GOP, daring not to challenge or openly embracing the altruistic motives of the perpetrators, stands by in ineffectual opposition or outright complicity. Meanwhile, as our freedom slips away, the fangs of altruism sink deeper. Consider these three pieces of evidence.

* Banks that emerged from the financial crisis in healthy shape are being dragged down by government’s attempts to “rescue” the financial system. Wells Fargo is being damaged by government’s “sacrifice the strong to the weak” altruistic policies. The company’s Chairman courageously spoke out against some of those policies:

Wells Fargo & Co. Chairman Richard Kovacevich criticized the U.S. for retroactively adding curbs to the Troubled Asset Relief Program [TARP], which he said forced the bank to cut its dividend, and called the administration’s plan for stress-testing banks “asinine.”

When the U.S. Treasury persuaded the nation’s nine biggest banks to accept capital investments in October, it signaled the whole industry was weak, Kovacevich, 65, said in a March 13 speech at Stanford University in California. Even though Wells Fargo didn’t want the money, it must comply with the same rules that the government placed on banks that did need it, he said.

“Is this America -- when you do what your government asks you to do and then retroactively you also have additional conditions?” Kovacevich said. “If we were not forced to take the TARP money, we would have been able to raise private capital at that time” and not needed to cut the dividend to preserve cash, he said. (Emphasis added.)

* In an essay published in the Objective Standard, Richard M. Salsman of the American Institute for Economic Research wrote:

[Former President] Bush pledged to “use the mighty muscle of the federal government” (his words) to meet his goal of extending home ownership to “underserved” minorities, by pressuring or subsidizing lenders to lower credit standards, on the premise that “corporate America has a responsibility to work to make America a compassionate place.”

[The] Federal Reserve Bank has for years distributed a booklet to mortgage lenders—Closing the Gap: A Guide to Equal Opportunity Lendingwhich includes sidebar reminders that fines and jail terms await those found to be deficient in fighting “discrimination” by lending to the less-than-creditworthy. The booklet, still distributed today, derides as “arbitrary and unreasonable” such traditional credit standards as a 20 percent down payment (or loan-to-value ratio of 80 percent), an above-par credit score, a history of paying one’s bills on time, and a steady job yielding an income sufficient to make monthly mortgage payments.
(Emphasis added.)

* Lest anyone needs more evidence of the altruistic insanity embedded in our policy-making apparatus, consider this astonishing letter delivered recently to a small Massachusetts bank:

A Massachusetts bank that has defied the odds and remained free of bad loans amid the economic crisis is now being criticized by the Federal Deposit Insurance Corp. for the cautious business practices that caused its rare success.

The secret behind East Bridgewater Savings Bank's accomplishments is the careful approach of 62-year-old chief executive Joseph Petrucelli.

"We’re paranoid about credit quality," he told the Boston Business Journal.

That paranoia has allowed East Bridgewater Savings Bank to stand out among a flurry a failing banks, with no delinquent loans or foreclosures on its books, the Journal reported. East Bridgewater Savings didn’t even need to set aside in money in 2008 for anticipated loan losses.

But rather than reward Petrucelli's tactics, the FDIC recently criticized his bank for not lending enough, slapping it with a "needs to improve" rating under the Community Reinvestment Act, the Journal reported.
(Emphasis added.)

Only the morality of altruism can justify a “needs to improve” demand for avoiding imprudent lending. East Bridgewater committed the unforgivable sin of “putting profits over people”, to use the cannibalistic language of the purveyors of the sacrifice of the strong to the weak:

"There are no apparent financial or legal impediments that would limit the bank’s ability to help meet the credit needs of its assessment area," the FDIC wrote in the CRA evaluation.

The impediment that did “limit the bank’s ability to help meet the credit needs of its assessment area” was its own rational self-interest. But need, according to the altruist morality, trumps reason, logic, justice, sound lending practices, the pursuit of profits…i.e., virtue. Declared one of the patron saints of the altruistic state, billionaire George Soros: “the public interest would dictate that the banks should resume lending on attractive terms,” but “this lending would have to be enforced by government diktat, because the self-interest of the banks would lead them to focus on preserving and rebuilding their own equity.” Indeed it would. But bank solvency is irrelevant next to “the public interest”. (Emphasis added.)

In a scene lifted straight out of the pages of Atlas Shrugged, the Soros principle is being carried out to the letter by the current administration and congress. In hearings held in February 2009, Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee and one of the biggest enablers of the GSEs in recent decades, warned top bank executives against putting “their own economic self-interest ahead of a necessary government program,” and “urged” them to become more “willing to make some sacrifices,” by acceding to still further controls.

And according to Reuters:

U.S. Treasury Secretary Timothy Geithner said Wednesday he would consider forcing out chief executives of banks that receive government bailouts if they were not managing their businesses properly.

In an interview with CBS, Geithner said economic recovery depends on a financial system that effectively provides credit, and the government would hold companies receiving public aid accountable.

When asked whether he left open the option to pressure a bank CEO to resign, Geithner responded, "Of course. Of course."

When you consider Geithner’s threat within the context of the TARP funds being forced on healthy financial institutions that didn’t need nor ask for any “bailout”, America’s direction becomes clearer.

The market discipline that ultimately determines if a business is being run “properly” is profits, which are determined by how efficiently a business is run coupled with the satisfaction of its customers. No more. How well a bank meets the credit needs of something called the “economy”, as determined by government officials, will now be the determining factor.

Altruism means sacrifice, and nothing else. Where there is sacrifice, there must be something to sacrifice…success, prudence, ability, rationality, justice, freedom…at the alter of the God of Need.

“There are people who aren’t broke,” said [Orren] Boyle slowly, “you boys have no excuse for permitting all that need and misery to spread through the country—so long as there are people who aren’t broke.” (Atlas Shrugged, page 535).

Such is the perverse, suicidal mindset that drives our leadership. At a time when financial institutions desperately need to be liberated to pursue their self-interest and their profits, policy makers ratchet up the pressure on them to self-sacrificially expand their lending based upon need, while simultaneously shackling them with more controls, intimidation, and threats.

The race is on to devour the successful and the prudent, in a desperate attempt to prop up an economy increasingly strangled by a new central planning aristocracy. Capitalism and free markets are blamed at a time that they are most desperately needed. Calls for “shared sacrifice” grow ever louder as a cure for a sagging economy, with few willing or able to see the profound contradiction in that logic. “Greed”, the anti-concept designed to obliterate the virtuous, life-giving selfish pursuit of personal gain, is condemned as the cause of our troubles. Czars are being placed in power in Washington to control vast segments of the American economy, essentially placing a moratorium on private independent judgement.

We are witnessing today the naked essence of altruism played out on a national scale. The phony cloak of compassion has melted away, exposing its true cannibalistic nature. In the midst of a ferocious financial catastrophe brought on by need-based lending imposed by “the mighty muscle of the federal government”, all we get are attacks on the remaining solvent banks. It’s obvious we are witnessing the dead end of the creed of sacrifice.

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