A Conversation With a Banker
Over the period of the last nearly quarter century my wife and I have had season tickets for Chicago’s Lyric Opera. We’ve occupied the same seats the entire time.
Over such a period of time you inevitably become acquainted with the other longtime subscribers sitting near you or, at least, my wife and I do since neither one of us is particularly shy. We’ve gone out to dinner with them before the opera. We’ve learned about their children, relatives, and dogs. I’ve attended their loved ones’ wakes.
As it happens one of our seat-mates is a woman who owns and operates a small, local bank. Although her bank hasn’t been involved with subprime mortgages or any of the other risky and complex financial instruments on which the financial crisis is at least in part being blamed, the last year has been a very hard one on her as you might expect.
While we were waiting for the opera to start, she and I had a conversation about the current situation in banking from her point of view that I thought I might pass on to you as food for thought.
First, small banks aren’t getting any of the money under the Troubled Asset Relief Program (TARP).
Second, federal bank regulators with whom she’s spoken have told her they expect 1,000 small banks to go out of business over the next year. As the owner of a small bank she finds that prospect horrifying but even more horrifying is that the bank regulators seem to consider this an acceptable loss.
Third, regardless of what we’re hearing from Washington these days, federal bank regulators are telling small banks not to make loans. I have no idea of whether this is a tactic on the part of bank regulators responsible for this region, whether it’s a strategy that’s come down from Washington, or what the reasons for it might be. I’m only recounting what my informant told me.
I won’t speculate on the reasons for any of these things. I’ll leave that to you in the comments. However, consider what the implications of these things will be after the financial crisis is over for, as Larry Summers reminded us just the other day, our experience has been that all financial crises and all economic crises end.
The decision has apparently been made that the very largest financial institutions including Citigroup, AIG, and Bank of America must continue to survive intact and, consequently, when the crisis is over they’ll still be around regardless of the condition of their balance sheets. In the process they’ll have received subsidies that are too large to understand or even keep track of. Some of that money will inevitably pass into the hands of the owners and operators of these institutions and, equally inevitably, disappear.
These subsidies mean that some of the market share and opportunities that would have gone to these financial institutions’ competitors won’t. And some of their competitors will go out of business that might not have otherwise.
As I see it the bottom line is that when all of the dust has settled we’ll have a less competitive market for financial services that is dominated by the reckless institutions that are most responsible for the fix we’re in.