Archive for the ‘Banking’ Category
By Thomas E. Brewton
The OECD Secretary-general seems not to understand the first and foremost responsibility of banks.
The Wall Street Journal carries the following brief interview note:
Angel Gurria, secretary-general of the Organisation for Economic Co-operation and Development, says the economic crisis will hit bottom in the last quarter of 2009, with a meager recovery starting in early 2010.
“2009 will be a very bumpy and bad year,” Mr. Gurria said. “2010 will be weak, but positive and in the black.”
Asked what sectors of the economy will drive the recovery, Mr. Gurria said: “Frankly the guys in the banks have to start doing their jobs again and start lending.”
A major contributor to the collapse of the financial community is the widely held attitude expressed by the Secretary-general that a bank's job is to lend money. Arguably, it was precisely the urge to lend at the highest possible rates of return that led banks and other financial institutions to acquire too many high risk assets.
Secretary-general Gurria is not alone in demanding that banks lend money now and in ways that government directs, regardless of risk. Influential members of Congress, including Congressman Charles Rangel and Senator Charles Schumer, have said the same things in recent weeks. In earlier years, Congressman Rangel was an instigator of the Community Reinvestment Act requiring banks to make a certain percentage of their loans to uncreditworthy borrowers in high-risk neighborhoods. Those borrowers figure prominently among loan defaults now plaguing the banks.
Perhaps it's unfair to attribute that frame of mind to liberal-progressivism, but it most assuredly is not a conservative attitude. Conservatism, in its Burkean, best sense, means respect for history and for tradition, without which society and enterprise easily become disoriented and distressed.
By Thomas E. Brewton
A brief historical overview of changing banking practices abetted by the Fed's inflationary expansion of the currency.
The main effect of the Fed's current moves is to bail out the financial institutions. That's what opponents of creating the Fed feared in 1913.
The Fed's acting as lender of last resort to tide banks over periodic panics was, in 1913, vastly different from today. Banks then were more prudent, confining their lending to short-term self-liquidating advances, usually with maturities no longer than 90 days. Moreover, borrowers were expected to clean up their credit lines, that is, to pay loan balances down to zero at least once a year to demonstrate the strength of their balance sheets.
In the late teens and early 1920s, the only collateral eligible for rediscount at the Fed was bankers acceptances (export-import financing with maturities again of maximum 6 months) and commercial notes representing domestic shipments of goods to creditworthy companies. Not even Treasury Bills were eligible for rediscount in the Fed's early days. The effect was to confine commercial banks to financing agriculture and commerce. This tended to limit bank credit expansion to the underlying real growth of business.
Today, as the newspapers tell us in profusion, lenders are heavily involved in originating obligations with maturities up to 25 years.
When inflation began to take off around 1969, banks began to talk about "liability management." Old line relationship bankers had been schooled to know each corporate client intimately and to stick with that client through the ups and downs of the economy. After 1969 the game shifted to finding new sources of bank funds to carry new types of lending. Banks became something analogous to traffic directors for funds coursing around the world via 24/7 satellite networks.
Two major developments triggered this transition.