America`s real long-term problem is simple. It does not know how to run a bank. In the annals of banking since the beginning of time, this will be known as the industry`s Dark Ages.
It used to be so conservative and so genteel, so proud and confident. It helped finance good, measured growth after World War II, housing a generation with low-cost money and equipping a powerful industrial base.
Now look around. No city in America is without a herd of white elephants, those virtually empty towers of glass, concrete and steel built with the hard- earned deposits of ordinary people. It was easy for developers in the 1980s to get tax-subsidized financing for these projects from bankers who saw a gold mine in the return.
This brick-and-mortar boom occurred at the same time that many industries seeking financing for new investments or for new products discovered that the cost of money was too high-and considered too risky. The sad thing is that many of these firms turned to foreign capital to put their ideas into reality, and we lost the technology in the process.
As it has turned out, this was not very smart banking. There was no gold mine in commercial real estate, just as there was no gold mine in loans to the Third World a decade earlier. In chasing after the big returns, bankers exhibited lemming-like behavior that did many of them in and hobbled many more.
But the problem remains. America still does not know how to run a bank. The key issue for any banker, whether that banker be in the private or public sector, is where to invest depositors` money that will guarantee a good, safe, long-term return.
In my mind, banking encompasses more than America`s commercial banks and savings-and-loan associations. It includes many classes of lenders, as well as governments themselves.
The federal government operates like a bank, disbursing more money than it takes in on grounds that taxpayers would not stage a run on the
institution. Corporations have what are, in effect, internal banks in which they must decide what to do with their profits. Pension funds and various mutual funds wield enormous power to make investments with their vast pools of money.
Money is many things, but nothing if not an opportunity. As most everyone knows, you can blow it extravagantly or you can invest it wisely.
Our federal government has been a horrible banker. As overseer of the financial system, it ripped prudence to shreds by encouraging borrowing to finance current consumption. By insuring deposits at $100,000, it gave the private banking system no incentive to run safe, sound institutions. At the same time, it hampered the private banking system with regulations that prevented banks from going into safer lines of businesses.
Much of the government`s direct investment goes into the military. Planes and missiles do buy security, a not-unimportant goal, but the U.S. has overinvested in weapons compared with the rest of the world.
A good banker has an eye on the future. But there is scarely anything forward-looking about the way the government itself invests or directs private investment through its tax and regulatory policies.
The times cry out for greater investment in education, the environment, technology and transportation. Yet government at all levels appears to be curtailing spending and investment in these key areas of national importance. Private financing in these areas is hamstrung by a financial system that has become extremely averse to risk. Burdened by terrible real-estate portfolios, this system is not eager to rush into new areas, no matter how promising some may appear on the surface.
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The system is suffering from a massive crisis of confidence, a financial post-traumatic shock. The real cause of the lingering credit crunch is not overbearing government regulators but the visible wreckage of misplaced leverage.
No wonder banks have found the Treasury bill a safe investment haven and large institutional investors shy away from firms that exhibit some boldness in their corporate strategies. This is an era of retrenchment and
consolidation caused by bad American banking.
The entire financial system needs some confidence-building. Here one must turn to the political system for help, even if government has shown itself to be woefully inept as a banker. But, to be frank about it, we have no one else to break this investment gridlock.
The country needs a national investment strategy. This means changing regulatory practices and tax laws. It means giving new definition to the banking system, so that it will know what rules will guide it in the future. It means rethinking how new technology is created and nurtured in this society. It means encouraging investment in our infrastructure and in our children`s education.
Where will we get the money? Good banking creates wealth over time. It will pay for itself and help slash the deficit too. Are there any good bankers out there anymore?