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<h2>bankcris</h2>
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<p> The Next Banking Crisis:
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=========================================
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The Issue Whose Name They Dare Not Speak.
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========================================= </p>
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<p> Late in June, [the Bush] Administration unleashed a bill that
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would gut the Community Reinvestment Act (which requires banks to
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make loans in their own neighborhoods, including low-income
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areas), ease restrictions on loans to a bank's own officers and
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directors and postpone the effective date of some tighter
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regulations contained in last year's banking law.
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- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
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This proposal is only the latest in a series of deregulatory
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gestures by the Administration and the Fed. [whose] gifts to the
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financial industry -- [recently] forty-five actions, taken rather
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quietly since December [..] mandate looser capital requirements,
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lighter supervision and gimmicky accounting. Their collective
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effect is to make the banking industry look healthier than it
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really is and to permit riskier behavior in the future. These
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moves defer tomorrow's disasters
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- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
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The CBO estimates that the repeated delays in shutting down
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insolvent institutions from 1980 to 1991 added $66 billion to the
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cost of the S&L bailout -- enough to fund the Aid to Families with
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Dependent Children program for three years, or AIDS research for 50 </p>
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<p> The Next Banking Crisis:
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=========================================
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The Issue Whose Name They Dare Not Speak.
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=========================================
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By Doug Henwood, _The Nation_, July 20/27, 1992
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(See below for more about _The Nation_) </p>
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<p>Transcribed by Joseph Woodard </p>
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<p>Whatever happened to the financial crisis? Only a year ago, it seemed
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the credit system was imploding, and ever-more-extravagant bailouts
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appeared inevitable. Now, the Resolution Trust Corporation (R.T.C.),
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liquidator of failed savings and loans, is winding down operations;
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banks and surviving thrifts seem generally profitable; and the seizure
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of failing institutions has all but ceased. Surely the weak, possibly
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failing, economic recovery we've seen since late last year can't be
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solely responsible for this apparent reversal of fortune. </p>
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<p>No, finance owes its recovery mainly to an indulgent government, whose
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normal generosity has been deepened by election year concerns. The
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Bush Administration wants to bury the problem, Congress is happy to go
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along and the media aren't asking any unpleasant questions. Clinton
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raises the issue with his typical technocratic dullness, and Perot
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with his usual empty fury -- but neither has made that big a deal of
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the timely disappearance of the financial crisis. That's odd,
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considering that, as Bush campaign officials told Lynda Edwards of
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_The Village Voice_, people in their focus groups are obsessed with
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the savings and loan bailout and wonder why the press isn't covering
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it. </p>
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<p>One reason the banking mess has receded from view is that the Federal
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Reserve -- which no doubt prefers that the financial system never be
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an electoral issue at all -- has been easing policy gradually but
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steadily since March 1989. The federal funds rate (the interest rate
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banks charge one another for overnight loans), the most sensitive
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indicator of the central bank's policy, has fallen in thirty-two of
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the past forty months, pushing short-term interest rates to their
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lowest levels since 1963. </p>
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<p>Although the economy has barely responded to this treatment -- no
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modern slump has proved so resistant to lowered rates -- it has helped
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refloat the banking system in at least two ways. First, banks haven't
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really shared the Fed's generosity with their customers. Rates charged
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for loans haven't declined anywhere near as much as those paid on
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deposits, boosting bank profits. And second, long-term rates haven't
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declined nearly as much as short-term rates. Leaving aside two brief
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spikes in the 1950s, the gap between long-and short-term rates is the
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widest it's been since the dislocations of the 1930s and 1940s. This
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also fattens the banks, which have been buying government bonds
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(rather than making loans) and pocketing the large spread between what
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they pay their depositors and what they can get from Uncle Sam. Should
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the relation between long-term and short-term rates return to normal,
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the banks would take a quick turn for the worse. </p>
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<p>Fed chairman Alan Greenspan isn't the banks' only friend. The other is
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the man who has said he will do anything to get re-elected, George
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Bush. Late in June, his Administration unleashed a bill that would gut
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the Community Reinvestment Act (which requires banks to make loans in
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their own neighborhoods, including low-income areas), ease
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restrictions on loans to a bank's own officers and directors and
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postpone the effective date of some tighter regulations contained in
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last year's banking law. </p>
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<p>This proposal is only the latest in a series of deregulatory gestures
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by the Administration and the Fed. The Durham, <span class="PERSON">North</span> Carolina-based
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Financial Democracy Campaign recently issued a five-page list of such
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gifts to the financial industry -- forty-five actions, taken rather
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quietly since December, that mandate looser capital requirements,
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lighter supervision and gimmicky accounting. Their collective effect
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is to make the banking industry look healthier than it really is and
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to permit riskier behavior in the future. </p>
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<p>These moves defer tomorrow's disasters, shoring up shaky banks (more
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than 1000 are on the F.D.l.C.'s problem list); yesterday's disasters
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are being dealt with separately. The government has virtually stopped
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seizing failed banks and thrifts; the liquidators can only move in
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when ordered to by Administration agencies (the Office of Thrift
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Supervision and the Comptroller of the Currency, both fiefdoms within
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Nicholas Brady's Treasury Department), and such orders aren't being
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given. This is good news for the liquidators, since their insurance
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funds are broke, and Congress is reluctant to vote them more money --
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at least not in an election year. </p>
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<p>If you listen to the R.T.C., its work is nearly done. Even though it
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has run through only half its budget, the corporation is shutting
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offices and reducing staff. Among the staff being reduced, as Susan
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Schmidt has been reporting in _The Washington Post_, are lawyers with
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the professional liability section, who are supposed to be going after
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the executives and board members who ran the thrift industry into the
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ground. With a three-year statute of limitations (running from the
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moment institutions are seized), the division needs more staff, not
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less -- but the R.T.C. is dismissing experienced lawyers and replacing
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them with novices. No one can prove anything yet, of course, but the
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likely targets of such liability investigations, aside from bankers,
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would be realtors, accountants, lawyers, doctors and others who are
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likely to be generous campaign contributors to both parties. </p>
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<p>Insofar as there's a strategy behind this delay in dealing with the
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banking problem (aside from political expediency), it's one of
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"forbearance" -- the hope that the problem will just go away with time
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and economic growth. But the economy is hardly growing, and insolvency
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isn't one of the diseases that time can cure. The Congressional Budget
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Office estimates that the repeated delays in shutting down insolvent
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institutions from 1980 to 1991 added $66 billion to the cost of the
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S&L bailout -- enough to fund the Aid to Families with Dependent
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Children program for three years, or AIDS research for fifty. </p>
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<p>Students of the S&L disaster are reminded of 1988, when the same trio
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of co-conspirators -- the executive and legislative branches, assisted
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by a lazy or complicit media -- ignored the disaster until after the
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election. In early 1989, the thrift crisis was suddenly "discovered,"
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only to disappear again in accordance with the quadrennial cycle. </p>
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<p>But the problems won't just go away. Bank and thrift balance sheets
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are contaminated with billions of dollars of loans that went to build
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pointless shopping centers and see-through office buildings. Salomon
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Brothers estimates that it will take a national average of twelve
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years to fill up existing empty commercial real estate -- ten years in
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Los Angeles, twenty-six years in Boston, forty-six years in New York
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City and fifty-six years in San Antonio, the national champ. </p>
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<p>Aside from increasing the ultimate cost of the financial rescue, the
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conspiracy of silence has largely prevented any serious discussion of
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why the financial meltdown happened or how we might make the best of
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the situation. The government is spending hundreds of billions of
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public dollars to restore business as usual. Instead, failed
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institutions could be transformed to publicly or cooperatively owned
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local development banks, and the government's vast inventory of
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near-worthless real estate could be turned over to community groups,
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local governments or nonprofit associations for creative use. But some
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things are too important to be discussed openly, especially during
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election season. </p>
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<p>**************************************************************
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Doug Henwood is Editor of _Left Business Observer_ (see below)
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************************************************************** </p>
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<p>
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##################################################################
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Reprinted with permission - granted by The Nation magazine/The Nation
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Company, Inc. Copyright 1992
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##################################################################
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Subscriptions to _The Nation_ -- published since 1865 and the oldest
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weekly magazine in America -- are $32 per year (47 issues):
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The Nation // Dept MAP // 72 Fifth Ave. // New York, NY 10011
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Or a half-year subscription (24 issues) is $22.
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