Super Banks -- Friend or Faux?

By Browne, John | Tribune-Review/Pittsburgh Tribune-Review, June 8, 2008 | Go to article overview

Super Banks -- Friend or Faux?


Browne, John, Tribune-Review/Pittsburgh Tribune-Review


Millions of Americans are having difficulty making their mortgage payments. Some are facing foreclosure proceedings by their lender, often a bank. Banks maintain they are helping to alleviate borrowers' woes. But the truth is far from clear. The banks are in a mess and so are we.

Can they help us get out of it?

In the movie classic, "It's a Wonderful Life," the townspeople of Bedford Falls run to their building and loan. Having waited for its doors to open, they rush the lobby demanding a return of their money.

Uncle Billy, the president, had locked the doors in a panic. His nephew, George Bailey, aka Jimmy Stewart, tells the depositors that the money they want to withdraw is tied up in the homes of friends and neighbors; there's not enough cash in-house to return all the deposits. The crowd is calmed. The building and loan is saved. So is the town.

George Bailey is long gone. But escalating gas and food costs are not. Many teens cannot find summer jobs. The friendly community bank has been devoured by the multi-departmental, hierarchical super bank.

Historically, local banks enjoyed a relationship of trust and confidence with their customers. The men who owned these banks gained depositors' confidence through individual accountability and willingness to assume any and all losses. Cautious and conservative by nature and with an eye toward profitability, the personal relationship with each depositor was foremost in their minds. This allowed bankers to assess not just the financial ability but also the personal willingness to repay a loan. This personal nexus was the factor that J. P. Morgan considered crucial to successful banking.

In the late 1800s, community banks in major ports such as Boston, New York and Philadelphia were joined by "money center" banks that financed the massive trade passing through their cities. The financial viability of these larger banks could affect the nation as a whole. The liquidity of these money center banks therefore attracted national concern.

In response, Congress enacted the Owen-Glass Federal Reserve Act of 1913, which established the Federal Reserve Bank or "the Fed." Effectively a central bank, it was charged with ensuring banking liquidity. It also was given the notorious and often conflicting "dual mandate" of maintaining currency stability and full employment. The Fed was empowered not only to set short-term interest rates but also to issue money.

Prior to the Great Crash of 1929, banks loaned investors "easy money" to encourage the purchase of the securities underwritten and sold by them. This, in turn, spawned speculation, making the crash all the more severe. The easy money associated with the current bank and mortgage fiasco is reminiscent of 1929.

To help thwart another crash, in 1933, Congress enacted the Glass- Steagall Act, which precluded deposit banks from underwriting securities. It provided protection for investors and banks alike.

Following World War II, banks continued to grow and prosper. The privileged access to low-cost money enjoyed by banks made them particularly attractive to aggressive businessmen.

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Super Banks -- Friend or Faux?
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