Don't Blame the Bankers

While it's true that there are some pretty crooked bankers and Wall Street types floating around, bankers as a whole aren't a bunch of crooks, any more than any other group of professionals are (the people who control the "central banks" being the possible exception).  At the moment however, American bankers are being denigrated as greedy parasites and the cause of our economic woes on a daily basis by politicians and the media.  In fact it's the politicians themselves, and their accomplices in the media who are to blame for our current dire financial position. Bankers are merely their current scapegoat, just as the health insurance companies were during the fight over ObamaCare.

A dominant theme in America's history over the last 100+ years, has been our government's never ending attempts to regulate and control our once free market economy.  History shows us clearly, that every single time government has tried to "fix" something in our economy, their actions made things worse rather than better, and oftentimes created new problems as well. 

An early example of how government intervention into the free market economy never seems to work out well can be seen in the creation of the first transcontinental railroads. There simply wasn't sufficient traffic in the mid 19th century to justify the huge costs involved in building those railroads, but the government intervened in the belief that a coast-to-coast railway system would enhance America's prestige abroad.  They did so by giving huge land grants adjacent to the rail routes to the builders of each railroad.  But as the nation's economy and rail traffic grew exponentially, the railroads proved unable to handle the traffic.  The reason why was because they were built to get land grants, not to carry traffic.  As a result, they were built in the cheapest and most shoddy way possible. In contrast, one of the only railroads that didn't fail, the Great Northern railroad, built by James Jerome Hill, never received any land grants from the government and was 100% financed by private investors.

Starting with a railroad that was already bankrupt, that Hill and his investors purchased, the Great Northern was built a little bit at a time, expanding into the next market only after their previous extension started to turn a profit.  Anyone familiar with the term "Robber Barons" knows who got the blame for the failure of the railroads.  The free market system was blamed, but the railroads weren't creatures of the free market.  Instead, they were government created monopolies.  Government interference in the free market caused the problem, and yet the free market system took the blame.

Government interference in the free market didn't reach full bloom until 1890, with the passage of the Sherman Antitrust Act.  Americans were always wary of the concentration of power in the hands of the few.  Unfortunately they didn't discriminate between political and economic power. It was often heard that it made no difference to the working man whether he took orders from a bureaucrat or from his employer, however that wasn't true.  Political power was negative by its very nature.  Follow the rules or we'll take away your freedom or your property, the stick.  Economic power on the other hand was positive.  Do a good job and you'll get rewarded with increased earnings, the carrot. 

The government's antitrust case against Alcoa Aluminum, begun in 1937, wasn't brought because Alcoa was doing anything dishonest or malicious in any way. Alcoa was prosecuted due to the mere fact that it dominated the aluminum market, which of course Alcoa had created in the first place.  But while they may have had no competition in the aluminum market, Alcoa was still competing with alternative materials such as steel, and even wood, and when it was broken up, it was still a very small market indeed.  In fact the entire aluminum industry at the time, was only 1/6th the size of the American shoe industry.

The true destructive nature of the Sherman Act was clearly revealed in the Alcoa decision rendered by Judge Learned Hand, in which he wrote of Alcoa in part:

"It was not inevitable that it should always anticipate increases in the demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel."

Alcoa was prosecuted because they did everything so well that nobody could compete with them. In an essay about the case published in 1966, Alan Greenspan wrote:

"ALCOA is being condemned for being too successful, too efficient, and too good a competitor.  Whatever damage the antitrust laws may have done to our economy, whatever distortions of the structure of the nation's capital they may have created, these are less disastrous than the fact that the effective purpose, the hidden intent, and the actual practice of the antitrust laws in the United States have led to the condemnation of the productive and efficient members of our society because they are productive and efficient."

Industrialists today are still looked upon as the bad guys.  In political cartoons wealthy industrialists and bankers are usually pictured as fat little men with mustaches in black suits and top hats, holding bags of money.  They've even made a game of it as evidenced by the fact that the character is recognized by virtually everyone as the "Monopoly Man".  The lesson is clear.  To the Progressives and collectivists anyone who's rich and successful, probably got there by exploiting the worker or cheating the masses that comprise the market for his goods & services. 

Now our government has announced that it's filing suit against 17 of the biggest banks and financial institutions.  It's being done for the simple reason that Obama needs a scapegoat to blame the poor economy on, as his blame Bush strategy has become rather tiresome at this point.  But are these banks and financial institutions really to blame for the mess we're in?

Since the economic collapse began with the sub-prime mortgage fiasco, we have to look closely at the real culprit, the CRA (The Community Reinvestment Act of 1977).  The CRA was passed during the Carter administration, and greatly strengthened during the Clinton years.  It was initially motivated by do-gooders on the far left who sought a way to clean up America's inner city slums.  They figured that if the people living in those squalid homes actually owned them rather than paying rent to slumlords (like Valerie Jarrett and Tony Rezko), that they'd take pride in their homes and clean up those ghettos themselves.  Of course this seemed like a noble idea at the time. 

The problem, however, was that the people they targeted didn't have sufficient credit to qualify for the mortgages needed to buy those properties.  The CRA fixed that by requiring banks and mortgage companies to put out a certain percentage of their loans to people who weren't creditworthy, i.e., to the poor in the areas where they did business.  The banks had no choice but to comply for 2 reasons.  The first was that if they didn't, the government threatened to pull their membership in the FDIC, which would make it almost impossible for the banks to attract depositors.  The second reason was that after writing those "sub-prime" mortgages, they were able to sell them, with most of them going eventually to Fannie and Freddie.

The banks of course are privately owned businesses, and the executives who run them bear their primary responsibility to their shareholders.  So their choices were rather limited.  Either comply and make lots of money in fee income (from points and other fees charged when mortgages are generated), or refuse, in which case they'd likely go bankrupt. 

With so much easy mortgage money available, people started buying homes strictly as investments.  This of course caused the builders to build more housing than the market could absorb.  Of course the banks did what they had to do in order to survive.  One of the ways they came up with to sell off the mortgages they couldn't sell to Fannie or Freddie, was to package them in bundles and sell them as securities, with insurance (from AIG) to investors. 

But it really wasn't insurance.  By calling it something else, the government allowed AIG to write those "insurance" policies without having the capital reserves that all insurance companies are required to have in order to be sure that they can cover any potential losses.  When the market collapsed, AIG wasn't able to make good on those policies, as a result.  AIG of course went bankrupt, and the American taxpayers wound up bailing them out to the tune of $170 billion.  Blaming the banks & Wall St. for the subprime fiasco is like blaming a wild animal for biting someone.  The bankers were only doing what they had to do in order to survive in a hostile world, just like wild animals do when cornered.

Our current financial mess of course, is a lot more complicated than any of the individual problems of the railroads, or companies like Alcoa.  The reason why is that the after effects of all of those years of government interference with our free market economy, are unfortunately cumulative.  When you add up all of the ways that the government has screwed around with American business over the last hundred plus years, you get an America that's rife with corrupt crony-capitalism, and so deeply in debt, that any of several different events could have been the straw that broke the camel's back.  That it turned out to be the government created housing bubble, shouldn't be surprising to economic historians, due to the enormous effect that a slowdown in the construction industry has on so many other industries that supply both products and services to the nation's builders.

The cause of the problem is easy to see for anyone with an objective and rational mind.  The leftist, liberal and progressive elements of our government, in their effort to achieve power at any cost, are killing the golden goose of American business.  We're only barely surviving right now, because there's still lots of seed corn for them to consume, but at the rate they're eating it (borrowing) the entire house of cards will likely collapse within the next few years, and I'm not just talking about America, as the death throes of the socialist governments of the European Union take place before our very eyes.  It's become so bad that it's doubtful that America could survive another 4 years of an Obama presidency.

54 years ago, when Atlas Shrugged was published, Ayn Rand told us all what to expect if we continued on the path that we were on. I knew she was right when I first read Atlas in 1963.  I just never thought it would happen so soon.

While it's true that there are some pretty crooked bankers and Wall Street types floating around, bankers as a whole aren't a bunch of crooks, any more than any other group of professionals are (the people who control the "central banks" being the possible exception).  At the moment however, American bankers are being denigrated as greedy parasites and the cause of our economic woes on a daily basis by politicians and the media.  In fact it's the politicians themselves, and their accomplices in the media who are to blame for our current dire financial position. Bankers are merely their current scapegoat, just as the health insurance companies were during the fight over ObamaCare.

A dominant theme in America's history over the last 100+ years, has been our government's never ending attempts to regulate and control our once free market economy.  History shows us clearly, that every single time government has tried to "fix" something in our economy, their actions made things worse rather than better, and oftentimes created new problems as well. 

An early example of how government intervention into the free market economy never seems to work out well can be seen in the creation of the first transcontinental railroads. There simply wasn't sufficient traffic in the mid 19th century to justify the huge costs involved in building those railroads, but the government intervened in the belief that a coast-to-coast railway system would enhance America's prestige abroad.  They did so by giving huge land grants adjacent to the rail routes to the builders of each railroad.  But as the nation's economy and rail traffic grew exponentially, the railroads proved unable to handle the traffic.  The reason why was because they were built to get land grants, not to carry traffic.  As a result, they were built in the cheapest and most shoddy way possible. In contrast, one of the only railroads that didn't fail, the Great Northern railroad, built by James Jerome Hill, never received any land grants from the government and was 100% financed by private investors.

Starting with a railroad that was already bankrupt, that Hill and his investors purchased, the Great Northern was built a little bit at a time, expanding into the next market only after their previous extension started to turn a profit.  Anyone familiar with the term "Robber Barons" knows who got the blame for the failure of the railroads.  The free market system was blamed, but the railroads weren't creatures of the free market.  Instead, they were government created monopolies.  Government interference in the free market caused the problem, and yet the free market system took the blame.

Government interference in the free market didn't reach full bloom until 1890, with the passage of the Sherman Antitrust Act.  Americans were always wary of the concentration of power in the hands of the few.  Unfortunately they didn't discriminate between political and economic power. It was often heard that it made no difference to the working man whether he took orders from a bureaucrat or from his employer, however that wasn't true.  Political power was negative by its very nature.  Follow the rules or we'll take away your freedom or your property, the stick.  Economic power on the other hand was positive.  Do a good job and you'll get rewarded with increased earnings, the carrot. 

The government's antitrust case against Alcoa Aluminum, begun in 1937, wasn't brought because Alcoa was doing anything dishonest or malicious in any way. Alcoa was prosecuted due to the mere fact that it dominated the aluminum market, which of course Alcoa had created in the first place.  But while they may have had no competition in the aluminum market, Alcoa was still competing with alternative materials such as steel, and even wood, and when it was broken up, it was still a very small market indeed.  In fact the entire aluminum industry at the time, was only 1/6th the size of the American shoe industry.

The true destructive nature of the Sherman Act was clearly revealed in the Alcoa decision rendered by Judge Learned Hand, in which he wrote of Alcoa in part:

"It was not inevitable that it should always anticipate increases in the demand for ingot and be prepared to supply them. Nothing compelled it to keep doubling and redoubling its capacity before others entered the field. It insists that it never excluded competitors; but we can think of no more effective exclusion than progressively to embrace each new opportunity as it opened, and to face every newcomer with new capacity already geared into a great organization, having the advantage of experience, trade connections and the elite of personnel."

Alcoa was prosecuted because they did everything so well that nobody could compete with them. In an essay about the case published in 1966, Alan Greenspan wrote:

"ALCOA is being condemned for being too successful, too efficient, and too good a competitor.  Whatever damage the antitrust laws may have done to our economy, whatever distortions of the structure of the nation's capital they may have created, these are less disastrous than the fact that the effective purpose, the hidden intent, and the actual practice of the antitrust laws in the United States have led to the condemnation of the productive and efficient members of our society because they are productive and efficient."

Industrialists today are still looked upon as the bad guys.  In political cartoons wealthy industrialists and bankers are usually pictured as fat little men with mustaches in black suits and top hats, holding bags of money.  They've even made a game of it as evidenced by the fact that the character is recognized by virtually everyone as the "Monopoly Man".  The lesson is clear.  To the Progressives and collectivists anyone who's rich and successful, probably got there by exploiting the worker or cheating the masses that comprise the market for his goods & services. 

Now our government has announced that it's filing suit against 17 of the biggest banks and financial institutions.  It's being done for the simple reason that Obama needs a scapegoat to blame the poor economy on, as his blame Bush strategy has become rather tiresome at this point.  But are these banks and financial institutions really to blame for the mess we're in?

Since the economic collapse began with the sub-prime mortgage fiasco, we have to look closely at the real culprit, the CRA (The Community Reinvestment Act of 1977).  The CRA was passed during the Carter administration, and greatly strengthened during the Clinton years.  It was initially motivated by do-gooders on the far left who sought a way to clean up America's inner city slums.  They figured that if the people living in those squalid homes actually owned them rather than paying rent to slumlords (like Valerie Jarrett and Tony Rezko), that they'd take pride in their homes and clean up those ghettos themselves.  Of course this seemed like a noble idea at the time. 

The problem, however, was that the people they targeted didn't have sufficient credit to qualify for the mortgages needed to buy those properties.  The CRA fixed that by requiring banks and mortgage companies to put out a certain percentage of their loans to people who weren't creditworthy, i.e., to the poor in the areas where they did business.  The banks had no choice but to comply for 2 reasons.  The first was that if they didn't, the government threatened to pull their membership in the FDIC, which would make it almost impossible for the banks to attract depositors.  The second reason was that after writing those "sub-prime" mortgages, they were able to sell them, with most of them going eventually to Fannie and Freddie.

The banks of course are privately owned businesses, and the executives who run them bear their primary responsibility to their shareholders.  So their choices were rather limited.  Either comply and make lots of money in fee income (from points and other fees charged when mortgages are generated), or refuse, in which case they'd likely go bankrupt. 

With so much easy mortgage money available, people started buying homes strictly as investments.  This of course caused the builders to build more housing than the market could absorb.  Of course the banks did what they had to do in order to survive.  One of the ways they came up with to sell off the mortgages they couldn't sell to Fannie or Freddie, was to package them in bundles and sell them as securities, with insurance (from AIG) to investors. 

But it really wasn't insurance.  By calling it something else, the government allowed AIG to write those "insurance" policies without having the capital reserves that all insurance companies are required to have in order to be sure that they can cover any potential losses.  When the market collapsed, AIG wasn't able to make good on those policies, as a result.  AIG of course went bankrupt, and the American taxpayers wound up bailing them out to the tune of $170 billion.  Blaming the banks & Wall St. for the subprime fiasco is like blaming a wild animal for biting someone.  The bankers were only doing what they had to do in order to survive in a hostile world, just like wild animals do when cornered.

Our current financial mess of course, is a lot more complicated than any of the individual problems of the railroads, or companies like Alcoa.  The reason why is that the after effects of all of those years of government interference with our free market economy, are unfortunately cumulative.  When you add up all of the ways that the government has screwed around with American business over the last hundred plus years, you get an America that's rife with corrupt crony-capitalism, and so deeply in debt, that any of several different events could have been the straw that broke the camel's back.  That it turned out to be the government created housing bubble, shouldn't be surprising to economic historians, due to the enormous effect that a slowdown in the construction industry has on so many other industries that supply both products and services to the nation's builders.

The cause of the problem is easy to see for anyone with an objective and rational mind.  The leftist, liberal and progressive elements of our government, in their effort to achieve power at any cost, are killing the golden goose of American business.  We're only barely surviving right now, because there's still lots of seed corn for them to consume, but at the rate they're eating it (borrowing) the entire house of cards will likely collapse within the next few years, and I'm not just talking about America, as the death throes of the socialist governments of the European Union take place before our very eyes.  It's become so bad that it's doubtful that America could survive another 4 years of an Obama presidency.

54 years ago, when Atlas Shrugged was published, Ayn Rand told us all what to expect if we continued on the path that we were on. I knew she was right when I first read Atlas in 1963.  I just never thought it would happen so soon.