Tuesday, December 8, 2009
Poor Misunderstood Bankers
Bankers, commercial bankers specifically, are a poor misunderstood lot. They are so different from their cousins the investment bankers, who are a totally different breed of cat. Bankers in the early days of this country were not a well liked group either, because I would say, they are such a misunderstood group.
Banks in the early days of this country started up with a few dollars in gold or silver, or even copper as a reserve against the paper money, bank notes, that they issued. In the early days, there was no central bank such as the Federal Reserve Bank. Banking had very little if any regulations. People that accepted bank notes on any given bank were saying that they had confidence in the people that ran that bank. They also felt that if they presented those bank notes for gold, that the bank would meet their demand because the bank would have gold on deposit in the bank's vault. But, like all things human, some banks issued more bank notes than they had gold on hand to back up. A loss of confidence in a bank could mean a run on the bank and if everyone demanded gold for their bank notes, well you can see what would happen.
Now let us jump forward about 200 years to the present. The banking system in the United States consists of a central bank, the Fed, and several National and State chartered banks. The situation in 2007-08 when the Fed came to the rescue of the commercial banks prevented what might have become a run on the banks. But, what would have that meant in 2007? If everyone went to their bank to withdraw cash money, bills, so they knew they had their money in their hands, the banking system would almost certainly collapse, in my opinion. Banking and confidence go hand in hand.
The Fed did not have much of a choice in 2007. The first order of business was to prevent a run on the banks and maintain the confidence of the people, and hope that they would leave their money, in the form of savings and demand deposits (your checking account) in the banks.
So, is it any wonder that the banks would be the first to be made whole and the rest of us to lag behind in the present recession. I have nothing wrong with this scenario, except, all the banks that were "saved" were not commercial banks. With the end of the Glass-Steagall Act in 1999, banks were permitted to enter other businesses like securities brokerage and insurance. Goldman Sachs and Morgan Stanley became banks so they could keep their heads above water in 2007. The Fed permitted this and now we have banks that are not banks, but they can borrow at the Fed's window. The ability to borrow at the Fed's window means you are a commercial bank.
I realize I have run a lot of history into a very few words, but I hope you get my drift. Helping commercial banks from going under to stabilize the economy and prevent a run on the banks is understandable. But, the misuse of the word bank in the present era, I do not go along with, and it still leaves this country and our economy at risk. Unfortunately, our Congress does not have a clue about all this, and so, we are headed down the same road again.