In defence of bankers
- Ivo Vegter
- 26 Jan 2010 (South Africa)
Throughout history, moneylenders have been getting the short end of the stick. As soon as an economy turns sour, everyone from Jesus Christ to Barack Obama promptly overturns their tables, and denounces them as thieves. Everyone from the Crusaders to Adolf Hitler blamed financiers for their economic woes. That bankers were typically Jews, and since both Christianity and Islam are tough on usury, gave the spectacle a nasty xenophobic aspect.
Expect more of this demagoguery when Obama delivers his State of the Union address this week. But while it serves politicians to deflect popular outrage on a class other than themselves, why do we believe them?
The real crime is that politicians get away with shifting the blame while having created the very circumstances in which they accuse the bankers of reckless profiteering. The real recklessness is the alacrity with which the media sustains the storyline they're fed by politicians covering their own backsides.
These are the very same politicians who keep getting themselves caught up in scandals over pork-barrel spending and improper expenses. They're hardly angels, which makes it all the harder to understand how they get away with blaming bankers for all the world's financial ills.
Do bankers deserve some of the blame for the present financial crisis? Surely, they do. In any financial bubble, the incidence of greed-fuelled fraud increases. In any market mania, traders get, well, manic. Their risk appetite increases because they fear missing the ride to the peak at which the bubble bursts. Banks bear some responsibility, if only for creating complex financial instruments that, while they are an excellent means of spreading and mitigating risk, in principle, obscured the quality of underlying assets so much that they were impossible to value. As a result, all the debt-backed instruments became toxic. When it became clear that some fraction of the underlying assets was worthless, nobody could tell which fraction.
However, all this happened in a highly regulated environment. It happened despite the extensive oversight powers of of a coterie of regulatory agencies, from the Senate Committee on Banking and Housing, to the House Committee on Financial Services, to the Securities and Exchange Commission, to the Federal Reserve itself.
All this happened because for the most part bankers simply operated within the legal framework imposed upon them by politicians.
Bankers didn't pass the Community Reinvestment Act and similar laws elsewhere in the world, which restrict risk management practices such as redlining and explicitly enjoin banks to lend to lower-income, higher-risk customers. Bankers didn't create the Federal Housing Administration which sought to regulate the terms of home loans and insure them against default. Bankers didn't create Freddie Mac and Fannie Mae, which stood ready to buy all those excessively risks (i.e. "sub-prime") mortgages the banks were encouraged to issue. Bankers didn't provide the taxpayer guarantee to these institutions, nor did they create the notion of being "too big to fail".
If bankers relied on these mechanisms, and took risks that they would not have taken without all the explicit and implicit cover offered by a raft of financial regulation, did they act in any way other than one should expect? If a government offers banks means to increase their profits, or reduce their immediate risk, can one blame them for not refusing such gifts?
And when the entire pyramid scheme finally collapses, who is most to blame? Those who believed the government guarantees and were proved right when they were bailed out, or those who issued the guarantees and raided the taxpayer for bailouts?
Should we not blame the central bankers, who kept issuing cheap credit to keep a credit-fuelled property market booming?
Should we not blame politicians like Barney Frank, the ranking Democrat on the House Financial Services Committee, who probably did more than anyone else to fuel and sustain the housing bubble that led to the credit crisis?
It was Frank who opposed, in 2003, a proposal to improve the regulation of Freddie Mac and Fannie Mae, telling the New York Times that: "These two entities ... are not facing any kind of financial crisis. The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."
It was Frank who said: "I believe there has been more alarm raised about potential unsafety and unsoundness than, in fact, exists."
How can we believe allegations of reckless gambling on the part of bankers, levelled by the same man who said: "I want to roll the dice a little bit more in this situation towards subsidized housing."
Frank was not alone. Maxine Walters, the Democrat from California, said about housing market regulation, "If it ain't broke, why do you want to fix it?"
When Fed chairman Alan Greenspan somewhat disingenuously raised concerns about the danger of a housing bubble, Chris Dodd, the senior Democratic senator from Connecticut, replied: "I, just briefly will say, Mr. Chairman, obviously, like most of us here, [that 70% of Americans own their own homes today] is one of the great success stories of all time."
So, all was well while it lasted. The very politicians who are now calling for the heads of bankers declared banking regulation to be fine, and a crisis far from likely. Should we not be blaming them for the very laws and regulations in which banks were asked to operate?
George W. Bush is no less guilty. The immediate run-up to the crisis happened on his watch. He, too, blamed Wall Street for irresponsible greed. He too did not heed the warnings. He too did little until the crisis hit, and when it finally did, he too responded with bailouts and a helicopter drop of cash. The Republicans, while in power, were little different from the Democrats in power today, inasmuch as they blamed bankers for their own reckless mistakes.
Now it might be that bankers are callously disregarding public sentiment by voting bonuses for their directors and management. It does not matter to the public that the quantum of the bonuses is tiny. It does not matter that by merely minimising losses, or obtaining bailout capital to ensure a bank's survival, the managers of those banks may have done exceedingly well, and may well be eminently deserving of their bonuses.
Now Obama is proposing to cut banks down to size. This despite the fact that nobody knows what that size should be, and what, if anything, constitutes "too big to fail". This despite the fact that the largest entities in this entire sorry saga are two mortgage houses created and supported by the US government itself.
I used the US as an example here, but the US is not unique. The story repeats itself the world over. The UK's moat-building and duck-pond-filling politicians were equally quick to blame bankers for the collapse of the credit bubble. They required them to issue sub-prime loans, and when they did, called them greedy for doing so.
In South Africa, too, the banks receive a great deal of opprobrium. Just last week, I wrote that they're incapable of addressing the needs of the poorest half of our population. But that this is so is less a fault of the bankers than it is a fault of the heavily-regulated environment in which they operate. If they do not need to fear competition from new entrants, why bother trying to establish expensive infrastructure to service low-margin customers?
Banks are merely the product of ordinary, profit-seeking behaviour within the constraints of a legal and regulatory framework. When things go wrong, then, is it because of the profit motive, or because the law encouraged – or even required – banks to act in a certain way?
If greed led to bank failures, how could this behaviour be rational, except on the understanding that if things do go pear-shaped the government will step in? If a bank can expect bailouts, so that its losses aren't realised, can it be accused of reckless risk-taking?
It is a scandal that anyone still believes these lying politicians. While they have their hands in the cookie jar, they're proposing to blame everyone else for the effects of their own policies. Bankers, as always in history, are hard done by.
The next politician who fuels populist anger by blaming greedy bankers for all the world's ills should be booed off the stage and voted out of office. That would be sweet justice.
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