Questionable Judgment

009 will be a very bumpy and bad year

by: thomas e. brewton | published: 02 02, 2009

The OECD Secretary-general seems not to understand the first and foremost responsibility of banks.

The Wall Street Journal carries the following brief interview note:

Angel Gurria, secretary-general of the Organisation for Economic Co-operation and Development, says the economic crisis will hit bottom in the last quarter of 2009, with a meager recovery starting in early 2010.

"2009 will be a very bumpy and bad year," Mr. Gurria said. "2010 will be weak, but positive and in the black."

Asked what sectors of the economy will drive the recovery, Mr. Gurria said: "Frankly the guys in the banks have to start doing their jobs again and start lending."

A major contributor to the collapse of the financial community is the widely held attitude expressed by the Secretary-general that a bank's job is to lend money. Arguably, it was precisely the urge to lend at the highest possible rates of return that led banks and other financial institutions to acquire too many high risk assets.

Secretary-general Gurria is not alone in demanding that banks lend money now and in ways that government directs, regardless of risk. Influential members of Congress, including Congressman Charles Rangel and Senator Charles Schumer, have said the same things in recent weeks. In earlier years, Congressman Rangel was an instigator of the Community Reinvestment Act requiring banks to make a certain percentage of their loans to uncreditworthy borrowers in high-risk neighborhoods. Those borrowers figure prominently among loan defaults now plaguing the banks.

Perhaps it's unfair to attribute that frame of mind to liberal- progressivism, but it most assuredly is not a conservative attitude. Conservatism, in its Burkean, best sense, means respect for history and for tradition, without which society and enterprise easily become disoriented and distressed.

Historically a bank's fiduciary duty is to protect its depositors' funds, to be able to return them intact upon demand. Using large percentages of depositors' funds to acquire assets such as securitized mortgages in structured investment vehicles violates the traditional, conservative banker's code. The banker was to know his borrower well, face-to-face, and to assure himself that the borrower was of good character and possessed of the financial capacity to repay his loan, as well as to take suitable liquid collateral to cover any default of payment.

Ramping up lending now, when banks' capital bases are under stress from having to write off so many bad loans, is antithetical to protecting depositors' funds.

In a broader sense, the demand that banks lend regardless of economic conditions or the financial soundness of borrowers reflects the view that banks are just another conduit for fiat money created by the Federal Reserve. This is implicit in the Keynesian faith that collectivized planning by the political state is the prescription for economic prosperity. In it there is no room for individualistic judgment.

We are, as Franklin Roosevelt said in his first inaugural speech in 1933, to move forward like a great army commanded by our leaders. Benito Mussolini, whom Roosevelt admired, had been expressing exactly the same doctrine for his Fascist Italy in the 1920s.

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