I know the headline above verges on “dog bites man” but the New York Times story, “In Louisville, View of Banks’ Role in the Everyday” is pure financial services industry PR masquerading as Norman Rockwellesque treacle. I know Fridays in the summer are usually slow news days, and the Grey Lady might occasionally have to scrounge a bit to fill its pages, but this story is lightweight, one-sided, and authority flattering.
The message is none too subtle: you can’t be mean to those banks! They are part of our communities! We really really need them! Even a city in the heartlands like Louisville depends on them!
Of course, the subtext, that reining in the banks will hurt communities like Louisville, is simplistic and misleading. It never seems to occur to the author that the seeming pervasiveness of banking industry players is what you’d expect to see with an industry that, like the medical industry, has managed to extract more in the way of revenues and profits that the value added of its industry. There is no denying that capital markets and banking services, like electricity, accounting, and law, are essential to modern commerce. But overly high charges for essential services is tantamount to a tax on the productive sectors of the economiy.
In addition, the banking industry has managed to get itself in the perfect position to loot. It enjoys substantial state guarantees yet has very few restrictions on its operations or pay levels. So taking any and every remotely profitable risk is the rational course of action for employees, and devil take the taxpayer.
But such nasty complicating factors never rise to the story in this reality-free account of banking in Louisville. The story tells us that Goldman did a bond deal for the local sports arena (how considerate of them!) then rattles off a list of names of banks that have big offices there (so? Louisville is a pretty big city, and serves a fairly large geographic area).
Then we get the message:
As Congressional negotiators begin the final stages of overhauling the financial regulatory system, with a hope of preventing or limiting economic crises, many lawmakers have portrayed Wall Street and Main Street as fiercely at odds. The Senate Republican leader, Mitch McConnell of Kentucky, denounced the bill at one point, saying, “It punishes Main Street for the sins of Wall Street.”
But here in Mr. McConnell’s hometown, Main Street seems to be an extension of Wall Street. At 333 East Main is B. F. Capital, an investment and venture capital firm. Actors Theater of Louisville, at 316 West Main, counts Chase bank among its leading corporate sponsors.
“As Wall Street and Washington go, so goes Main Street,” said Jack Guthrie, a past president of the Louisville Main Street Association. “Indirectly and directly, Main Street is connected.”
Yves here. Ultimately, this is a prettified version of the message that was used to cram down the TARP: you don’t dare cross those banks, they’ll blow you up too.
And this segues to “the borrower was to blame” theme:
Put another way, Main Street seems less an innocent victim of Wall Street in the financial crisis of 2008 than a savvy counterparty, whose own dealings contributed to the days of easy credit and overinflated real estate prices that led to the collapse.
“I don’t think anybody skirts the responsibility of borrowing properly,” said Dale J. Boden, the president of B. F. Capital. “Certainly we saw it in some of our multifamily residential developments — condominiums — where those mortgage lenders out there soliciting the business were very aggressive. If you were warm and could make an X on the page, you were almost guaranteed to qualify.”
Yves here. I don’t want to fall into the same gross oversimplifications that this story dishes out liberally. There were borrowers who were foolish and greedy. But this story completely omits the key element of the normal banking relationship. It is the LENDER who is taking the risk in this equation, therefore the burden of making sure there is a reasonable expectation of the loan being repaid falls on him. Borrowers throughout history are known to be anything ranging from prudent to overly optimistic to morons to outright crooks to just plain unlucky. This “I don’t think anybody skirts the responsibility of borrowing properly,” is a lame excuse for the utter absence of lender due diligence.
And the piece also completely omits all the fee-enhancing, risk-shifting traps and snares that became the staple of financial services products, starting from pushing municipalities to rely on an unreliable auction rates securities market that led to a doubling or tripling of financing costs, to derivatives sold to parties who didn’t adequately understand them, to our favorite toxic product that even blew up their makers, collateralized debt obligations. As we remarked in ECONNED:
But opacity, leverage, and moral hazard are not accidental byproducts of otherwise salutary innovations; they are the direct intent of the innovations. No one was at the major capital markets firms was celebrated for creating markets to connect borrowers and savers transparently and with low risk. After all, efficient markets produce minimal profits. They were instead rewarded for making sure no one, the regulators, the press, the community at large, could see and understand what they were doing.
Yves here. But instead, the Times story parrots the “regulation will cost you” meme:
Mr. [ballard] Cassady [president of the Kentucky Bankers Association] said that banks throughout the state would face onerous regulations that could put some out of business, and that a new consumer financial protection agency could impose rules that would raise costs for businesses and consumers. Rather than focusing on the unregulated mortgage lenders who caused the subprime crisis, he said, Washington was treating all banks as the same.
Yves here. In some respects, this is not entirely wrong. Product safety does not come for free. Shrinking an overly large financial services industry may result in some players exiting the business, and it will also result in more costly debt (earth to base, since small businesses find it difficult to get credit at any price, the idea that more expensive or more restricted credit is due to regulation is a canard. The process of going from debt bubble blowing to healthier practices necessarily entails less readily available borrowing). But to hear Cassady tell it, the only bad actors in the entire financial services industry were those Wild West mortgage brokers.
So the Times tells us we must not merely resign ourselves to the fact that the power that be have come pretty close to reconstituting the financial services industry that nearly drove the global economy into the ditch. After all, we must not forget that they are our neighbors too, even if they haven’t behaved in a very neighborly manner.