Now expanded  and updated:

In Defense of the Banks

By Susan Shelley

Everyone should be able to get a loan, and no one should have to pay it back.

That's the Obama Doctrine on financial reform.

Banks should be making loans to folks who want to buy cars and houses and start small businesses, and if the folks can't pay back the loans because they're struggling, the banks should make modifications to the loans.

Why should the banks do this?

Because bankers are dastardly evil villains who stole your money for high living and good times.

AmericaWantsToKnow.com predicted in a 2008 post titled "Hank Paulson's casting call" that the Troubled Asset Relief Program bailout, which was forced on all the major banks whether they wanted the money or not, was a slick trick to shift the blame for the foreclosure crisis to the banks and away from the politicians who created incentives and guarantees that caused traditional lending standards to be abandoned.

After all, lending standards cause people to be turned down for loans. Banks typically can't stay in business by making loans to people who don't have the ability to pay them back.

Unless the federal government guarantees the loans.

Then it's no problem at all to make loans to people who can't pay them back, because the government promises to pay the bankers with your tax dollars if the borrowers default. That way, politicians get credit for helping struggling folks buy homes.

And when the folks don't pay and the government makes good on its guarantee and gives tax dollars to the bankers, guess what?

The bankers are dastardly evil villains who stole your money for high living and good times.

If you own a home and you're older than five you probably remember the days when you had to take a wheelbarrow to the mailbox to carry all the solicitations for home equity loans, refinancing loans, second mortgage loans and home equity lines of credit. Some of them came with a pre-printed check attached to a cheery message: Just sign it and deposit it and buy yourself a vacation, a new car, a new kitchen, whatever you want! There was small print on the back but, you know, life is short.

A lot of people spent their home equity as if it was a monthly check from the California Lottery.

A lot of people gambled and bought houses and condos as a get-rich-quick investment.

A lot of people were shocked and dismayed when home values declined.

Some of them put the keys in the lock, called the bank and said, "Come get your house."

But so distorted was the mortgage market by implicit and explicit government loan guarantees that financial institutions all around the globe had purchased mortgage-backed securities in the belief that they were completely safe.

When it turned out that they weren't, the panicked Bush administration pressured Congress for an $800 billion bailout fund to buy up the "toxic" securities and prevent a worldwide financial collapse.

The TARP fund never did buy up the troubled assets. The money was pushed out to "stabilize" the banks, against the will of the banks in many cases.

So let's be clear. If anybody took your money for high living and good times, it's not the executives of the major U.S. banks. It's the folks who are now struggling after borrowing money they never should have been loaned in the first place.

Cold, but true. Not all, but many of the people who are threatened with foreclosure borrowed recklessly and bought a nicer house or blew the money on fun stuff they couldn't afford any other way.

Now President Obama and the Democrats in the House and Senate are trying to reform financial regulations with the stated goal of maintaining financial stability in the future.

When you are on the wrong premise, Ayn Rand wrote, you will always achieve the opposite of what you intend.

Here's one premise: the banks must ease their lending standards to make more loans and must modify the existing loans of customers who are struggling.

Here's another premise: the banks must maintain sound lending practices and hold their customers to the contracts they sign.

On which premise are we more likely to achieve financial stability, and on which are we likely to achieve the opposite?

History has the answer, and you don't have to look back too far to find it.

Of course, President Obama and the Congressional Democrats may not intend to protect financial stability as much as they intend to protect their own power to pressure the banks into doubling as social welfare agencies.

The proposed financial reform bill would give the executive branch of the federal government the power to pre-emptively close down any bank or non-bank financial institution if government officials believe it poses a systemic threat to financial stability. Without any benchmarks, standards or specifics, simply on the say-so of a politician or his appointee, a financial conglomerate could be threatened with an immediate liquidation that would wipe out the debt-holders, the shareholders, and the employees.

Government officials who have that kind of power won't even have to ask for what they want. Financial institutions will be working day and night to find ways to please them.

Here's a premise: President Obama and the Democrats want to have unlimited, invisible and unaccountable power to force the titans of the financial industry to do whatever they say.

That must be the right premise. The plan they have drawn up will achieve it perfectly.

April 24, 2010

Editor's note: "Hank Paulson's Casting Call" was posted to AmericaWantsToKnow.com on October 17, 2008. Susan Shelley is the author of the novel The 37th Amendment, which includes an appendix on "How the First Amendment Came to Protect Topless Dancing." Both are now available in eBook editions from Amazon.com.

© Copyright 2010 by Susan Shelley