Congress, Banks and Bailouts

Back in October I posted brief essay, Federal Government Begins Nationalization of American Banking System, in which I expressed concerns that the Emergency Economic Stabilization Act of 2008 (Wikipedia summary or full text), a.k.a. Public Law 110-343-Oct. 3, 2008, a.k.a. the "Bailout Bill" had the potential to, for all practical purposes, allow Congress to nationalize a significant portion of the banking industry. Now it seems that others, particularly the Presidents and/or CEOs of smaller or regional banks, share my sentiments.

I would like to call attention to a news item entitled "Smaller Banks Decline Bailout" (Matt Apuzzo, Associated Press, January 30, 2009) which opens with the following paragraph:

"A small but growing number of community banks are backing out of the government's bailout, which they see as fraught with hidden strings and government interference."

The article goes on to gives direct quotations from a number of banking officers from around the country, such as this one from David Heintzman, the president of Stock Yards Bank & Trust in Louisville, Kentucky.

"The government's going to own a good portion of these [those that accepted "bailout" money] banks..."

Mr. Heintzman's bank turned down $43 million in previously-approved bailout money.

Michael Ross, President of Fidelity Bank in Dearborn, Michigan, says that taking the money would mean the government would have owned about 25 percent of his company's outstanding stock. After that, Congress and the White House could have a voice in how the bank is run.

"These are the guys [Congress and the White House] who brought you Hurricane Katrina. These are the guys who were supposed to be watching Fannie and Freddie... I've not seen anything like this, where they really are talking about nationalizing banks," said Mr. Ross.

Under the terms of the government's plan, if a bank accepts government money, Congress wants that bank to use the money to make loans so businesses can expand and people will start buying houses again. The catch is that lawmakers want banks to make loans to only those with near-perfect credit scores and stable employment. Unfortunately, in a weak economy with high unemployment, there aren't that many borrowers who would be able to qualify for new loans.

Correct me if I'm wrong, but I seem to remember some talking-head interviewing another talking-head before they agreed that it was an over-priced and over-brought housing market that was the root cause of the current financial distress. So what does Congress want to do? Force the banks to make loans to pay for more houses!

Given that the federal government, meaning Congress, the Treasury Department, and the White House are pressuring banks to "participate" in the bailout programs, it's just a matter of time before the feds start telling banks who they can lend to. I'm guessing that the government's money, coupled with Congress' plain old fashioned greed and hunger for power, will all but formally nationalize the nation's banks by no later than the summer of 2010.

History is full of instances when the citizens of a country have voluntarily handed over their freedom to a relatively young, charismatic leader. Italy did it in the 1920s, and a decade later more than a few members of Congress were looking at Mussolini's Italy as a model of how the United States should deal with its Great Depression. Argentina of the 1940s was an economic and political basket case when it decided that Juan and Eva Peron had the solution to rampart inflation and double-digit unemployment.

Mark Twain once made a statement to the effect that history doesn't repeat itself but it does echo loudly. I hate to say it again but, with an apology to Mr. Twain, welcome to the Weimar Republic of America.

http://en.wikipedia.org/wiki/Weimar_Republic

http://en.wikipedia.org/wiki/Nationalization

http://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008

http://www.amarillo.com/stories/013009/Bus_12438445.shtml

http://www.answers.com/topic/dearborn-bancorp-inc