Saturday, January 17, 2009

Invest in Community Financial Institutions
Old Bank Now Tattoo shop - Nashville

Posted in January 17th, 2009
by Rowan Wolf

Congress approved the release of the remaining $350 billion in TARP funds to address the financial meltdown. One has to assume that much of the money will follow the same trip into the void that the rest has. Money going into the financial markets has to go somewhere else than where it is currently going. If we are going to throw money into financial institutions, I say let’s throw it into community banks and credit unions, and not into big finance.

On January 6th David Goldman calculated that thus far $8 trillion has been thrown into the maw of the so-called bailout. This includes Federal bailouts and investments, and Federal Reserve inputs and loans. Eight TRILLION dollars.

Clearly, that seems to be having little effect, and people don’t understand why. The “why” is somewhat complex, but at the bottom of it is a derivatives “market” that is a phony money. The estimated value of that market exceeds the gross domestic product of the entire planet. We (and every other nation) can throw money at this bottomless pit until there is nothing left to throw - the ultimate example of the snake swallowing itself. As long as we throw money at “Big Money” there will be no improvement. What we will see is the creation of ever larger conglomerates of “financial institutions” who are “too big to fail.” We are seeing this with AIG, with JP Morgan Chase, Bank of America, Citigroup, and the list goes on.

Bank of America (BofA) is an interesting case study. BofA wrote up $2.39 billion in losses in the last quarter of 2008. So they are now approved for $20 Billion in bailout funds. This is above what they have already received ($45 billion including that went to Merrill Lynch which BofA “ate”). Sweet deal if you can swing it.

ProPublica has a nice expose - BofA and Gov’t’s Secret Deal - which discusses that the bailout guarantee for BofA was approved before the second half of the TARP funds was voted on.

According to today’s Wall Street Journal, Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson made the guarantee because they feared that if BofA were to pull out [of the Merrill Lynch acquisition], it would shock the fragile financial system. But the deal has angered some of BofA’s shareholders, who wonder why the troubles at Merrill weren’t disclosed before the Dec. 5 shareholder vote to consummate the merger.

We do not need to change giants into leviathans who seem to be endlessly needy and are too big to fail. Instead we need a different strategy.

My suggestion is to provide investment funds to community banks and credit unions to deal with the foreclosure crisis and get money flowing in communities again. This approach would be more direct, and strengthen local economies which have already been bled dry by the “big boys.” The financial sector needs to get its own house in order if it wants to survive. Meanwhile, we can invest our present and future tax dollars where it will do the most good - within our own communities.

Let’s quit “saving” the financial industry which has sucked the country (and the world) dry with their “exotic” investment instruments and outright fraud. The uproar at the Madoff “Ponzi” scheme while not yelling from the roof tops that the whole financial industry was engaging in a Ponzi scheme is pure hyperbole.

If we address the housing and cash flow crisis through local banks and credit unions, we will move a long ways towards creating a stronger financial infrastructure. Community banks and credit unions are there to serve and invest in their communities. Money and investment there strengthens local economies and circulates economic resources where they will do the most good - in our own communities.


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