Regional Banks Can Solve the Credit Crisis
"When the laws undertake...to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society--the farmers, mechanics, and laborers--who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their Government." --
, Bank of the United States Veto Message, 1832.
No more happy talk. In a reversal of roles, the administration is using verbal fright tactics to get an angry nation to consent to its bundles for billionaires, even if it means sabotaging confidence in the financial system. The immediate result? Washington Mutual went down in the largest bank failure on record.
The Bush/Paulson/Bernanke plan is an elaborate contraption that will have no direct effect--certainly no instant effect--on the immediate problem, which is that it is becoming next to impossible to get a loan. That's what they mean when they use the term "liquidity crisis." To execute the buyout, hundreds--if not thousands--of Wall Streeters, most of them being paid the shockingly large fees they are accustomed to getting, will have to work weeks and months analyzing the complicated bonds the government is to purchase.
Taking the toxic waste, as they call it, off the hands of Henry Paulson's erstwhile Wall Street colleagues will not help Tom, Dick or Hillary when they try to buy a car, finance Christmas stock for the store or get working capital for the farm. There will be no waking up to rainbows and birds atwittering on the morning after the plan passes, if it does. The best we can hope for is a couple of up days on the market, days which may not be sustained.
Buying presently worthless mortgage-backed bonds now rotting on the shelves of Wall Street is a roundabout and unlikely way to restore the flow of credit and working capital to a car dealer in Ottumwa or to a manufacturer in Yakima or an Imperial Valley farmer. Either loans become available at decent interest rates in the very near future or we are going to be experiencing massive layoffs.
To get credit where it is needed--which is everywhere that business must get done--there are better ways, one of which is a legacy bequeathed to us by Andrew Jackson. The suspicions of a federally chartered central bank held by Jackson and the Jacksonian Democrats blocked the creation of such an institution for eighty years and, in its absence, brought with it eighty years of panics, confusion and monetary chaos.
When at last the United States created a national bank for itself in 1913, it came up with one that looks like nothing else on earth and certainly nothing like the Bank of England or the Bank of Japan or the European Central Bank. It came up with the Federal Reserve System.
In addition to the Federal Reserve Board in Washington, the system includes twelve regional, quasi-privately owned, quasi-independent banks, which in turn have twenty-five branches so that, taken together, they cover the nation. Their boards, which are required to have two-thirds non-banker membership, have their roots deep into the business communities of their respective areas of operation. Thus were the Jefferson-Jackson principles of decentralized, popular power incorporated into the banking system.
Because the regional banks are in direct and continuous contact with the more than 8,000 local banks and other institutions which take deposits from the public, they are an ideal vehicle through which credit can be made available to individuals and businesses quickly and directly.
With funds supplied by the Federal Reserve in Washington, the regional banks can negotiate the terms by which they can stuff the vaults of those 8,000 institutions with cash. With the cash comes the understanding that they must lend it, that they no longer need fear other banks will not repay them. The 8,000 banks can then contact their customers, car dealerships, factory owners, retail merchants, students looking for loans, real estate agencies and tell them that anyone with a good credit history will have no trouble getting a loan.
Such a scheme is not easily done, but it's doable. Thanks to the Jacksonian legacy we have the structure and the means to take care of the credit crunch or liquidity crisis on the local level. Some of those 8,000 banks will need propping up so that they do not go the way of WaMu. Many different arrangements with different banks will be necessary. Forcing that money into so many institutions so quickly will be sloppy and mistakes will be made but business and daily life can go forward.
Bypassing Wall Street to keep Main Street up and running is an emergency, stopgap solution. It will temporarily take care of only one of our problems, the inability to get credit or take out a loan. It does not do away with the big underlying problem, which is that ours is a debt-soaked, frighteningly over-leveraged society that is toppling in on itself--a society in which the bill has finally come due.