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.
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And then there have been the recent stories how widows and retirees depend on their BP dividend for their livelihoods…
Thanks for the posting. Think about what they got paid to write the piece and then what you got paid to debunk it.
Sad state of society.
I’m not sure I understand everything in this post at all.
Probably not.
Some questions, and observations :
Do the rules have to be the same for everybody, big banks and small ones, for example ?
Why ?
The same for big and small businesses. They are not doing business the same way at all.
On the risk factor… I have commented on it on the border guard incident as being a deciding factor in our collective psychology.
There is one thing that we need to understand about ourselves.
The less.. risk there is in our existence, the less we will tolerate the little risk that is still there.
This observation holds for almost everything. The fewer deaths there are, the less we will tolerate death itself.
The less crime there is… the less we will tolerate the remaining crime.
It’s not logical… but then, one would have to be rather dull (or a traditional economist ??) to insist that man be motivated solely by reason.
On the BP widows ? I think that there are probably retirees who have BP stock in their portfolios. Logical… every time we try separating out this mess to point fingers, every time we see how interconnected everything is…
Why I blame lenders more than (at least some) borrowers for the problem of bad loans:
1. Lending is like an arms race: any given property for sale goes to the bidder who is willing to pay (i.e. borrow) the most for it. That is an over-simplification, but there is an entire industry of realtors and appraisers devoted to getting the highest price for a given chunk of real estate.
So if other borrowers are taking out an “exotic” or “aggressive” loan in order to make their purchases, the average frustrated wannabe homedebtor who is not a hedge fund manager (i.e. filthy rich) has to follow suit and take out a risky loan if they want any hope of buying.
There is some merit to the arguments of those who say “just rent instead!” but that is hard to do if you want to provide your family with any form of stability, much less access to a decent school district. The usual libertarian/randroid response can be boiled down to “don’t have a family then unless you are a hedge fund manager” but even The Immortal Ayn had to have a future generation to work to buy her books and fund her annoying existence. (*My* response is: “since The Gospel According to Ayn is a sociopath’s charter, randroids should not complain if commies grab all they can, however they can. Enlightened self-interest and all that.)
2. Then there is the “keep the wife happy” factor. This may offend Yves’ feminist principles, but there is a reason the NAR filmed the infamous “Suzanne Researched This!” commercial the way it did. Try subsituting the husband for the wife in that commercial and see if it would not ring funny.
3. Of course when real estate prices were skyrocketing and every government and industry mouthpiece (not to mentionlenders by the thousands) preached homeownership like Party members in “1984,” the wannabe homedebtor probably did feel that if he/she/it did not buy now he would be priced out forever.
4. And last, the lenders are supposed to be the financial experts. Their disproportionate compensation relative to the rest of us is supposed to be based in large part because of their purported expertise.
“Then there is the “keep the wife happy” factor.”
Heh. I bought in June 2008. In the months leading up to that, I told my wife that it wasn’t a great idea from a financial standpoint—I’d long known there was a bubble because I followed Dean Baker’s blog.
But I didn’t put up a fuss because for various reasons I calculated that the potential loss in marital harmony outweighed the financial risks. (It helped that I figured the location that we bought in would be a bit less vulnerable to a steep decline.)
When real estate prices were rising, my little wifelet was convinced that home ownership was a guaranteed way to get rich.
Now she is even more convinced, because prices have fallen, so you must be getting a great bargain when you buy.
I don’t know about you, but I am selling everything I own and sending the proceeds and my life’s savings to Goldman Sachs now in order to avoid long lines later.
I also wrote to Monsanto, GM, and Exxon to ask them where I should send my small children to work as slave labor. If I ask nicely, maybe my kids will get outdoor work on a plantation or a nice factory instead of a skanky mine or a swamp.
Once that’s done I can sell my organs to some needy Citi execs (the proceeds go to Halliburton to compensate them for the drilling moratorium). My wife can probably get a job at the Senate brothel since she still looks pretty good; of course, she’s an adult woman, so she probably won’t get much traffic up on the Hill.
You forgot BP. Their exec suite will be furious if they don’t get their (strictly metaphorical) pound of flesh.
I read the piece as the financialisation of America, write small on what used to be a charming, Southern river town with a robust, deep manufacturing base. Oh, and the architecture of the bank bldgs on Main Street is atrocious-identikit HeadOfficeBlock.
“Product safety does not come for free.”
A strong warranty that counterparties are acting in good faith lowers transaction costs. It’s not been shown that “product safety” costs more than “caveat emptor”; rather, costs are shifted.
I’d say the piece *is* entirely wrong.
Moreover, by painting bankers as poor little financial neophytes who were conned by those cunning brokers, the article is strengthening the case for regulation, not weakening it. It’s making it look like the banks need protection from themselves. And so they do.
Greg,
Widen your frame of reference. “Product safety” is not a mere matter of warranties; if the warranties are effective, that means better products. That costs more. Tons of historical examples, starting with the meatpacking industry at the turn of the last century.
Blaming the borrower for taking “too much” credit is like selling a smoker life insurance and then blaming him for dying.
In the life insurance industry, where the companies still perform some due dilligence before they commit the shareholders to risk, they still bother to find out if you are a smoker before they offer you a cheap policy.
The NYT piece is an opinion. Was it printed on the editorial page; or was it printed in the ‘news’ sections? I’m unclear about how the piece was presented.
As to shifting responsibility for subprime; the responsibility begins with easy credit that is being funded with a fiat currency, thereafter follows investors chasing yield, thereafter follows wall street predators. Or; this all begins with legislators gone mad and a populus expressing every manner of foolishness and fraud that can be conceived.
In sorting things out, greater responsibility falls to the banks and investment banks that created all the boondogle paper. Any position to the contrary is either grossly naive; or worse, malevolent.
The NYT business page is represented as a news page with some labelled opinion/analysis columns, but it consistently prints op-eds masquerading as news features, as in this case.
So basically it’s a second op-ed page.
Stockholm Syndrome anyone?
Yeah perhaps. but this is a bit overused. Everybody is playing their part.
The peasants need a story for the tiny brains, there’s always a nobility with all the power. Democracy and justice in American were just an illusion; a story from a time long ago when things truly were different, and circumstances allowed the illusion of Democracy and justice to get started.
The US was a big open country then with lots of “those people” to kill and torment, resources to easily exploit.
We’re all filled up now: filled with raging pissed off peasant dumbasses, and nobody to torment.
This can’t be true:
“The Department of Treasury was pleased to announce that repayments to the TARP have exceeded what is owed by $4 billion. A first. I suspect it is fancy footwork by Treasury accountants.
Current real cost to taxpayers by a people that have been keeping track:
$10.4 trillion
http://www.sitemason.com/files/eowqtO/bailouttallymay2010.pdf
Don’t trust Geithner or Paulson. Both would potentially be in jail if held to the same standards as GS, and standards for GS are REAL LOW:
http://www.mcclatchydc.com/2010/06/08/95534/aigs-problems-far-greater.html?storylink=misearch
BP could learn from how Wall St handled the bailout:
Never were the innocent so transparently riped off by the perpetrators of the crime with the full and willing help of those “in-charge”.
If BP could get the same deal, Obama and the rest of the US government would be throwing taxpayer dollars at BP for their lost revenue, and then throwing the people trying to clean up the mess in jail for trying to steal BP’s oil.
1. Where are the guys that protect consumers ? 2. Why do small businesses today have to borrow so much to succeed. 3. Why does so much economy have to be invested in financial services today? 4. Would Eliminating the federal reserve eventually do away with the income tax? Where do incomes or wages have to be to empower people to gain economic freedom? Why do a lot of the people of the U.S. have both husband and wife working? Why did economist compare american productivity to foreign competition in public media style and induce americans to work harder than ever and sacrifice their wives and families to achieve productive superiority just to have their industries shipped overseas in the end? 5. Why do American industries have off shore banking and minimum taxes here and shirk their loyalties to the United States of America and still retain their american status? 6. Why does the immigration and naturalization Dept. give so many Indians engineering visas and the media claims it;s because of a under skilled and shortage of qualified engineers while the stats show a glut of engineering graduates are not being hired? 7. Why as farm workers go the engineer and construction workers and seamstresses , and any industry that can be subsidized by cheap foreign employees goes? 8. Do the economic sages realize as europe is having trouble managing their economic union so the world economy will be just as disrupted ? 9. How did America become responsible for the liquidity needs of the worlds economy in offering unlimited funds in loan from the famous printing presses ? 10. Why can muslims build a mosque at ground zero ? 11. How can america stand up with out self respect too so many slaps in the face of sovereignty and individual culture ? Just a few questions a need answers for ! Please forgive my ignorance!
What did you expect from the NEW YORK (emphasis added) Times ?
50% of Manhattan incomes stems from the finance sector. If you add all the more or less parasitic activity surrounding it (municipal services, food delivery system, entertainment, art galleries, etc…, oh, I forgot publishing and blogging !), you get close to 80% of the economy.
If “modern finance” disappears, NYC goes the way of Detroit with its automobile industry (or simply goes NYC 70’s edition). Now, consider the position of a NY based editor, whose main (and sometimes only) asset is its overvalued piece of real estate (s)he lives in, often on a leveraged basis. Is it the best position to produce an objective assessment ? I don’t think so.
The problem is structural. Bankers are human, just like their customers and depositors. As such, they will do what is best for themselves just as we all do. The way the system works, the government will step in any time the banks will get in trouble so the risk of losing one’s livelihood is very small for the average bank employee or manager. On the other side of the equation, the risk of losing out by being prudent is very high. That means that there is no way to ‘fix’ the system unless the government steps away and lets the bad bets be liquidated by the market. That would mean that the Fed and Treasury could not play their games and that Congress could not pass laws that force banks to lend to anyone they deem a bad risk.