THE LACK OF BANKS

That has been the talk of the town Over Here lately.  It seems that someone did the numbers and we are down to a mere 7,000 or so banks from nearly 20,000 about 30 years ago which is a hell of a drop but still a hell of a lot of banks.  If one considers that Great Britain at one point in time dominated the world of finance and commerce with something like 5 or 6 indigenous banks and a handful of Colonial institutions (Hankers & Shankers, Standard, Chartered and merchant banks galore), it seems like an even more enormous number.  But consider:  the United States is an enormous and incredibly diverse country, in population, industry, geography and economy.     What plays in Boston may not play on Broadway much less Omaha, so is there rightful concern that 7000 may not be enough as some have suggested to service this marketplace?

It is a really good question one having no easy answer.  Throw into the equation that the banks no longer around tend to be the smaller, community banks who were unable to compete and closed or merged, or those that tried to compete and ran into trouble trying to remain profitable, or those that were simply badly managed and were shut down.  Their market areas were assumed by bigger, often far removed institutions with no ties to the communities they supposedly served and hence, little understanding or empathy with the customers inherited.  There was no Ben the Banker who would approve an equipment loan to his schoolmate Fred the Farmer despite two years of flood followed by drought because Ben knew that Fred would auction his first-born to pay him back.  A credit officer far from the scene would approve or more likely than not disapprove that transaction.  And so would be lost the first rule of credit: Know Your Customer.

This is not a little thing especially when the country finds itself desperately needing to grown to get us out of this economic malaise.  In addition, in this period of consolidation caused in no little extent by the need to protect depositors through mergers, forced or otherwise, the result has been in too many cases punishment delivered to acquiring institutions for the sins of the acquired. resulting in a chilling effect on future credit-related operations.

Oh, I'm not trying to say that the Morgans and the B of As of this world are without sin, but after a while politically effected prosecutions and enforcement actions accompanied by clearly politically directed regulations take their toll.  The reaction is, "who needs this," and banks stop doing what they are in the business of doing which is to take risk.  And when that happens, well, you can see the result; diminished economic activity all-around.

Another thing happens.  Scared out of making money in traditional ways, banks cast afield for new opportunities for profit in non-conventional areas.  Disaster is often the result.  We have seen this happen with conventional lending with the move to areas such as "structured finance," and capital market activities which all but a very few institutions understand well enough in which to be involved.  Real danger there, but couple that with the coming implementation of the Volker Rule…about which I am damn near certain Mr. Volker wishes he had never begun the discussion…and another source of bank profitability is cut off and it will not be long before we are down to 5,000 banks and heading south.  We haven't thought this thing all the way through I'm afraid as we tend to do most things.  I mean, this is complex stuff…not something simple like providing health care for 325,000,000 people.

AN ENORMOUS SUCCESS

Then again, turning five isn't the hardest thing in the world but the triplets sailed through it with nothing but smiles and laughter.  To be that young and innocent...but we are not and it's back to business.

It would appear that after the great celebration of last week over the supposed solving of Europe's problems, reality has once again set in despite the French note auction of yesterday which immediately after it closed went to a negative yield.  The wise folks out there immediately proclaimed that France was surely in the catagory of Germanydespite the fact that anything in France that looked like a financial institution was ordered to bid on the damn thing and a six month auction tells us nothing about anything  The fact of Spanish yields inching above 7% again tells us a great deal more and none of it is good and the Spanish being given an extra year to meet the financial standards ordered by Brussels (which they have already said they will not meet) tells us a great deal more.  Not only are things not good, they are not getting any better.

Meanwhile, the great Libor scandal continues to grab the headlines with the special commission now trying to figure out who knew what when between the Chairman of Barclays and the CEO.  Yawn.

John Taylor of Stanford and the Hoover Institute, a very smart guy, had a piece in the WSJ the other day saying far more eloquently than I some free standing facts that I have been talking about for some time; to wit if you REALLY want to investigate interest rate manipulation look no further than the world's central banks and by all means start with the Fed.  As opposed to the terrible effects of the Libor manipulation--which, curiously, have yet to be identified--the central banks have caused real damage and it is there for all to see.

With the dollar as the reserve currency there is no point in not singling out the Fed as the culprit in this international dance macabre and the reason begings with one single fact; the dual nature of the Fed's mandate.  Somewhere along the line someone got the bright idea that a central bank should be more than a guardian of the risk of inflation and take on the added duty of assuring, to the greatest extent possible, full employment through the use of monetary tools.  Needless to say, the first role is often ignored in pursuit of the second, and particularly so by the political forces at play as inflation is the greatest friend a free-spending politician can have (not to be redundant) in most cases.  Of course the only tool a central bank has is to regulate the supply of money and in that is the rub: they will never admit to playing with interest rates but that is exactly what they are doing.  When the Fed does it the entire world is affected and the results are often not immediately apparent, not fully understood or simply ignored by the Fed who have adopted the view first expressed by Treasury Secretary James Baker who straightforwardly told a foreign finance minister, "The dollar is your problem not ours."
A more honest man never lived.

The last time the Fed really went after inflation or the threat thereof was back in 1980 when Paul Volker--a Carter appointment of all things--killed it in this country, stone, cold dead through the brutal application of monetary policy.  Of course he killed Latin America stone, cold dead as well and for a full ten years, and damned near killed the American banking system and a few other systems as well, but that was the last time in recent memory that our central bank showed any kind of monetary restraint and what we face today is the result of the distortions in a global marketplace that unfortunately continue and are magnified by the current policy of the administration in Washington.  Tune in tomorrow and we'll try to stroll through the last 20 years of financial history.