Fri, 11 Dec 2009

Do banks help?

Banks are in the news again, and not really for the best of reasons. Congress is just getting rolling on debating the reform of financial regulation, and we're hearing a lot about, well, unhelpful banking practices.

"Overdraft protection" for example. This is a system where the bank will honor a check that might overdraw your account, but charge you a stiff fee for the privilege. You can appreciate the beauty of this scheme with an account holding $300 and two checks, one for $400, and one for $15. Without overdraft protection, one would bounce and you'd be dinged for that one, but the other would clear no problem. With overdraft protection, the bank can charge you for both checks, because the first one makes the account balance negative, and the second makes it worse. In essence the bank is giving you a small loan, at potentially astronomical rates. Peter Wasylyk, a Rhode Island attorney, is currently trying to organize a class-action suit against big banks for this practice. (He's also a state representative from Providence.)

What else? It was reported in the Providence Journal a couple of weeks back that local banks are not participating in a part of the federal stimulus package meant for them. This provision was meant to provide very low interest loans or credit lines to area small businesses. As of the end of November, only 13 Rhode Island businesses had received loans, from only four banks. Most of the other banks complained of too much paperwork, or simply ignored the program.

And, of course, we can't forget the enormous executive bonuses paid by the big banks (including BankAmerica) straight out of federal bailout money.

But why are they doing these things? It's not because they're evil, but because they feel pushed into it. Banks are an essential part of our market economy. We can't do without them. Ben Bernanke (and many others) call credit the lifeblood of the American economy. But banks are also economic actors. They have to attract good talent, they have to have their loans repaid, and they have to earn money. The problem we all face is that there are lots of ways to do these things, and only some of them are good for the rest of us. For example, a bank could make money by getting its branch security guards to confiscate the wallets of its customers. Presumably a bank that did this would start losing customers -- unless all the other banks were doing the same thing.

Fortunately, that kind of strategy is against the law, so you can walk into a bank secure that you'll be allowed to walk out again with your wallet intact.

In truth, that's what regulation is all about: laws that restrict the kinds of competition to the sort we approve of. We regulate insurance companies, barber shops, taxi cabs and gas pumps because we know that the free market works -- and works well -- when the players in it are given limits. The regulations align the social needs of gas customers with the incentives of gas station owners. Pumps are inspected so that gas stations can't make money by cheating. The result is that competition happens elsewhere, and so you get 5c off Tuesdays and reduced-price car washes with gas and the like. And you also get a price-sensitive market where the prices are advertised in big letters at the side of the road.

What has happened to our nation's banks is that the great wave of financial deregulation ushered in by Bill Clinton and his predecessors, and pushed along by Congressional Republicans has brought us a market where anything goes. In the drive to cut costs, banks came to rely on fees for their income more and more each year. The cutting costs was a good thing, but replacing income from loans with income from customer fees created the wrong incentives -- instead of developing new loan customers, banks looked to capture account customers who could be assessed new fees.

The result of almost 30 years of deregulation is that banks make more money with fees than they do by lending. And so lending just isn't that important a part of their business. This seems strange, but it was a view expressed to me by a banker I met recently -- a commercial loan officer -- who told me that among the front lines, this is a common observation.

These conditions are not healthy -- credit is the life blood of the economy, not customer fees -- but they are also not necessary. Unfortunately, they are stable. A bank that earned most of its income from fees in 2009 is likely to do the same in 2010, and so is unlikely to be enthusiastic about being forced to change. It took years for our banking markets to settle on some of these solutions, and so getting us from here back to something more sensible may well be wrenching.

But some kind of wrenching is clearly required, because banks are routinely not acting in the best interests of our nation or our state. If we want banks to act to help our economy instead of hinder it, we must give them rules to follow, whether that be at the state or the national level.

17:43 - 11 Dec 2009 [/y9/cols]

Tue, 08 Dec 2009

Banks behaving badly

It seems local banks don't seem able to participate in an important part of the stimulus package. Read here.

01:03 - 08 Dec 2009 [/y9/de]

When it works...

I've lately been reading "Ground Truth" by John Farmer. It's a blow-by-blow account of the events of September 11, 2001, informed by a few bushels of recently declassified documents -- documents that either weren't available to the official 9/11 commission or they chose not to use. Farmer was counsel to that commission, so he was in a position to know what evidence was available.

What I am learning from the book is alternately depressing and enraging. Incompatible equipment and rules made interagency cooperation impossible. (And some of the "fixes" made in the aftermath have only made the situation worse.) Opportunities to capture or thwart the hijackers were ruined by bureaucratic turf warfare, poor planning, bad equipment and plans created for a cold war that was over.

Plus, most of the agencies involved lied about it after and classified the evidence of their performance, effectively thwarting any attempt to fix the problems in a rational way.

Now, I've worked in enough large corporations to know that these kinds of inefficiencies are endemic to all kinds of large organizations, not just government. I recall one company I consulted for that laid off several people from a profitable division primarily because there was a hiring freeze and they couldn't replace a business development guy who had left. Then there was the company that laid off every single engineer who worked there in order to outsource everything (key quote from the CEO: "If your job involves actually doing something, your job is at risk"). I was at another where the two chief engineers created incompatible software largely because they really didn't like each other. (One of these companies is still around and supposedly thriving.)

That said, if you yearn for good government, it's of very little comfort to know that private companies are often just as bad. So I figured this week it would be good to share some pleasant news about your state government, so you can have something to be thankful for.

The big news of the fall of course is health care. But the reform muddling its way through Congress takes a back seat around my dinner table to stories of the swine flu. The sudden emergence of the flu last spring, its odd behavior and unusual virulence have all combined to put us all on edge. I was at a meeting at a bank last week, and after everyone had shaken hands, the banker in charge passed out little bottles of hand sanitizer with the bank logo on them. On the bus, everyone looks when someone coughs, and I saw someone in a surgical mask while shopping last week.

On top of all that, there's a vaccine shortage. Given that it takes about six months to create usable supplies of vaccine, and that it's only been slightly longer than that since H1N1 was described specifically enough to make a vaccine, it's not terribly surprising that we're a bit short. But what you might not know is that your own little state is operating one of the smoothest distribution operations around.

I talked last week to a friend of mine, a physician who practices at clinics in Rhode Island, Massachusetts and sometimes Connecticut, and she told me that she has marveled at the differences. The shortage means that public health officials are trying to give priority to populations deemed at a higher risk than others -- pregnant women, children, etc. But at public clinics in Massachusetts, everyone who shows up has been given the vaccine and the guidelines go out the door, as do the long lines. There have been similar stories in other states, too. In New York City, thousands of doses were delivered to large companies with headquarters in the city (among them Goldman Sachs and Citigroup, which sparked some populist outrage) while hospitals were still waiting for their allotments.

But have you heard any of those stories from RI? My friend tells me she has not, and I have not, either. She instead told me about the regular bulletins she has been receiving from the Health Department, about the tight controls on who gets the vaccine when, and the efficient way things were organized when she showed up to volunteer for training as one of the school-vaccination team members. She also said, "It's amazing, there isn't even anyone to bribe -- I thought this was Rhode Island," though I think she was kidding.

It turns out that in matters of public health, Rhode Island punches above its weight. Statistics from the Trust for America's Health, a public health advocacy organization are a fairly comforting read. Of course there is plenty more to be done, but we don't do at all badly in the indicators they use to judge these things. Plus we're spending less to do it than many similar states. Data I got from the National Association of State Budget Officers says we're spending less per person on public health than any other state in the northeast, save only Vermont and New Hampshire, putting us just a bit above the national average, around 15th highest in the country.

One of the marvels of good government is that when it's good, it recedes from view -- the garbage disappears, the building permits appear, the insurance companies remain solvent, the vaccines are administered in the appropriate order. The departments that function well don't make it into the headlines. In a climate where public services are routinely belittled by the very people in charge of running them, perhaps this is politically unwise. Nonetheless, it is still something I'm thankful for.

01:01 - 08 Dec 2009 [/y9/cols]

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