re-starting local lending

This is a very interesting article I think we would all do well to read. Yes, I’m aware of the irony — looking at a state level solution. But, really the notion that Democrats want federal level stuff and Republicans want to kick things back to the states is mostly fictional. As we have seen repeatedly over the last decade, Republicans love Federal level legislation — so long as it lines their pockets. In any case, this article examines the effect the 2008 “bailout” had on local lending — and possible ways to address it. Via TruthOut: How the Bailout Killed Local Lending – and How Some States Hope to Bring It Back

Small and medium-sized businesses have traditionally been the main engines for increasing employment, and they need bank credit for their working capital; but today credit to local businesses has collapsed nearly everywhere.

That’s why so many states—the total is now fourteen—are considering turning to state-owned banks to get local credit flowing again.

The credit collapse of September 2008 was triggered by the speculative activities of giant Wall Street banks. These profligate banks, which would have gone bankrupt without federal support, have emerged from the crisis bigger and more powerful than before. The federal government has supported and subsidized bank consolidation, resulting in the elimination of more than a thousand community banks by takeover or failure.

Ouch. Ouch, and ouch. This is really disturbing. Remember the Democrats shouting about the “hedge fund loophole” in their efforts to budge Republicans on taxes to help fix the deficit? Take a gander:

And speculation is particularly lucrative at these very low interest rates. As blogger Philip George explains:

State Activity, Resource and Contact Info
The entities who really benefit from low interest rates are hedge funds and traders of financial instruments. Typically, they take advantage of mispricings of securities amounting to a few cents. And how do they parlay such tiny mispricings into incomes amounting to tens and hundreds of millions of dollars? By leveraging their equity ten, fifty, or a hundred times. And of course they can do that only if money is dirt-cheap.

How convenient that that loophole exists, and that the bailout has resulted in such low interest rates. In any case, the net result is that the huge, consolidated, monolithic banks are not interested in local lending. From their perspective, it’s way too risky. Far better to engage in speculative financial deals that are guaranteed with our taxpayer dollars than to deal with potentially messy things like mortgages, business loans, and the like which are not guaranteed, require collateral, and, horror of horrors, waiting a year or more for any return on investment. Indeed,

It can be very profitable indeed for the big Wall Street banks, but the purpose of the near-zero interest rates was supposed to be to get banks to lend again. Instead, they are, indeed, paying “outrageous bonuses to their top executives;” using the money to engage in the same sort of unregulated speculation that nearly brought down the economy in 2008; buying up smaller banks; or investing this virtually interest-free money in risk-free government bonds, on which taxpayers are paying 2.5 percent interest (more for longer-term securities).

It seems we’re simply waiting for the next market crash, since we’ve set all the pieces in place AGAIN.

So anyway, in the meantime, what to do about local lending? States can put together their own banks, and of all states, North Dakota has shown the way:

With lending to Main Street still anemic, some states are taking matters into their own hands and considering legislation that would put local credit back into the local economy. Fourteen states have now initiated legislation for state-owned banks based on the model of the Bank of North Dakota (BND), which provides liquidity for local banks and credit lines for local government. North Dakota has not lost a single bank to insolvency over the last decade.

I’d love to see what California could do with something like this, provided our own excreble brand of Republican politicians don’t hijack it… According to this article (referenced in the TruthOut article): State Activity, Resource and Contact Info, the 14 states with bills are: Arizona, California, Hawai’i, Illinois, Louisiana, Maine, Maryland, Massachussetts (bill has passed), Oregon, Vermont, Virginia, Washington (yes, I know that’s twelve, I am not sure how this is being counted, though you could include North Dakota). There are more states which are in the process of putting together legislation to submit to the state.

This fascinates me. If you recall our history, Jefferson and Hamilton squared off on the notion of a Federal Treasury. Hamilton had good reasons for putting the bank system the way he proposed (which is what we ultimately did); and yet the points Jefferson raised are relevant to today’s situation. I am curious about the implications of decentralizing the bank system in this way. Not that I think the current monstrosities that we have which speculate in the financial markets actually qualify AS BANKS. No bank should ever be permitted to engage in financial stock market speculation, for fuck’s sake (bring back the Glass–Steagall Act, already). If the Federal governmen’t won’t care for its own citizens, the states could step in. Of course, states aren’t always so protective of their own, either, as recent events in Wisconsin, Ohio, and now Minnesota (The GOP’s opposition to tax hikes for the rich is about to send 36,000 workers packing.) demonstrate.

In any case I’d like to conclude with something I found particularly apt from the PBI:

Forty-eight states currently have budget shortfalls. The common strategy being dictated in many of these states and in Washington is to call for budget cuts, eliminating important safety nets for the middle-class and those below the poverty line, as well as to repeal legislation guaranteeing collective bargain rights for unions. It’s as if the states and the federal government were corporations with no responsibility to their real stockholders, the citizens of the U.S.

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