January 23, 2010

Save The Banks! No, Destroy Them!

At various times in our history, the federal government has experimented with something called an excess profits tax.  During the Civil War the Confederate Congress flirted with the concept, as a means to fund the war effort.  Subsequent levies served a dual purpose: they both financed war-waging and discouraged profiteering by private contractors who might take unfair advantage of a national crisis.  Most economists will argue that this is a short-sighted fettering of industry, but sometimes desperate times call for desperate measures. The good news is that we won the wars, even if the contractors were denied a fair return on their investment.  American industries are resilient; the capital markets supplied them with fresh investments; life goes on.

But just how much profit is “excess?”  Exactly who gets to determine how much is too much, and by what formula?  Should we do away with free markets and set prices by government mandate, as they did in the Soviet Union?   We all know how that one turned out, don’t we?  You see, there’s this wall in Germany, or rather there isn’t one, that silently testifies to the wisdom of that strategy.  Joshua himself could scarcely have done any better.

During the oil crisis of the 1970s, Congress threatened to penalize the oil companies in this way.  Ask anyone who knows about such things, and they will tell you that oil exploration and refining is an extraordinarily expensive and risky business.  For every gusher they’ll find ten dry holes.  No other industry is hampered by so many costly environmental and safety regulations.  When Exxon reports a profit of $1 billion, most laymen don’t bother to examine how much they had to spend (and lose!) to get there.
Over the past couple of years our government has spent hundreds of billions of dollars to rescue banks and insurance companies, many of which were at or near the brink of ruin.  And now some of them have recovered and repaid their loans, reporting billions in new profits.  Hallelujah, the TARP program worked!

Or did it?

Now our president wants to penalize these same institutions for accomplishing the very thing the Fed commanded them to do.  He wants to impose a new excess profits tax and punish them for their obedience and success.  (Although, curiously, no one is using the term.)

Mr. Obama is indignant that the banks have built themselves into such behemoths, such that the failure of one can have such devastating effects on the national economy.  But just how, exactly, did this happen?

I can’t speak for the whole country, but I know the history of California in the last 30 years:  Brentwood Savings (they gave me my first credit card) merged with California Federal (once publicly touted by Bob Hope), subsequently acquired by Citibank (which earlier had gobbled up Allstate Savings).  Security Pacific Bank combined with Bank of America, which recently joined NationsBank, itself already the product of several mergers.

Are you keeping up?

Hibernia Bank combined with Crocker National Bank, which made history by bringing the first ATMs to the West Coast (and was famously robbed by Patty Hearst) back in the ’70s.  Crocker merged with Wells Fargo – which went on to acquire parts of First Interstate Bank (including the former United California Bank).

Back in the late 1990s a chain of mergers occurred in quick succession.  Home Savings acquired Coast Federal Bank.  Home was itself acquired by Washington Mutual, which also took over Great Western Bank (once endorsed by actor John Wayne) and American Savings.  In just a couple of years four old tried-and-true brands disappeared from the landscape, closing dozens of branches and shedding thousands of employees.

And has anyone seen a TV commercial for WaMu lately?  Nope, because that institution was recently acquired by JPMorgan Chase, itself the new combination of two centuries-old banking titans.  Yikes.

In case you can’t see my point in all of this, here it is: None of these transactions could have taken place without the explicit blessing of the federal government.  The Federal Reserve, or other federal agencies, must conduct extensive reviews and approve them.  The Attorney General can likewise set conditions, and/or challenge them in court.

As for the spate of recent bank failures, the federal government didn’t just passively submit to the plans of greedy CEOs.  To a large degree, it was a government mandate that forced the banks to lend billions to unqualified borrowers who everyone knew couldn’t afford it.

Either way, this crisis was both caused and exacerbated by your elected officials in Washington.  Don’t let them get away with it.

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