September 24, 2008
Last week, as Lehman Brothers imploded, Merrill Lynch was being absorbed by Bank of America, and sub-prime bundlers were calling in their default credit swaps with AIG, my two sisters and I exchanged phone calls on the history of banking regulation. Our own, that is.
Somewhere in the late 1950’s, when we were in single digits of age, our mother walked us up a few blocks from our home in Norwalk to open savings accounts for us at Norwalk Savings and Loan. It was the beginning of our financial life.
"Mom and Dad were children of the Depression," said my sister Joanie, who now lives in Manhattan Beach. "Saving money was very important to them, and they wanted to get us into the habit early."
Our initial transaction, as I remember it, was genuinely personal. The young bank officer in his sharp suit and tie sat us down around a huge oaken desk, took three $20 bills from Mom, and in return presented us with magnificent grownups’ passbooks in which he had written our opening balance. Then he gave us a short pep-talk on saving our money.
"He also gave us little see-through piggy banks," remembered Jeannie, now of Mission Viejo. "That really impressed me then. I think I may still have mine around somewhere."
We all got into the savings habit. "By the time we graduated from high school," Joanie said, "Jeannie and I had enough to pay cash for a new Volkswagen."
Watching my money grow became an obsession. With a full piggy bank or a fistful of crisp dollar bills from birthday or Christmas, I’d enter that temple of commerce, stand on tiptoe at the teller’s cage, and exchange it all for numbers handwritten in my passbook. When I got to decimals in school, I’d calculate the compounded interest myself and scrupulously check it against the bank’s figures.
The details of these childhood recollections may be a bit overdrawn, so to speak, but they all conjure up one basic feeling: confidence. In our community, the bank was second only to the church in terms of stability. Banks and S&L’s were primarily local businesses — Norwalk Savings had no branches — that drew their funds from neighbors’ deposits and loans. Savers got a steady five percent return. Loans were straightforward — no adjustables, no balloon payments — and their interest rates were capped by usury laws. Saving and borrowing from banks was easily understood and absolutely reliable.
As my father tirelessly pointed out in our dinner-table discussions, it was the reforms of the New Deal that had made things so. As I found out somewhat later, the Glass-Steagall Acts of 1933 and 1935 separated low-risk depository banking from high-risk investment banking, controlled speculation by confining commercial banks within state lines, regulated interest rates on savings accounts and loans, and guaranteed deposits through the Federal Deposit Insurance Corporation. Within these structures, bank panics, which my parents had experienced first-hand as young adults in 1933, would never happen again.
The FDIC is still in place, of course, and then some — the Bush administration is now proposing to extend its coverage to money-market accounts — but its surrounding mechanisms, which were what made it unlikely it would ever be used, have gradually been dismantled over the last 30 years.
Now, interest on savings has become so laughable (last month my bank, on what it calls its "High-Yield" savings account, paid me 0.4%) that you might as well opt for your mattress as a comparable savings instrument. Interest on your credit-card debt is double-digit, and adjustable-rate mortgages beg foreclosure. And with interstate and worldwide commercial banking, the loan you signed at your local branch of Behemoth Bank has probably been sliced and bundled and bought by China.
What was lost in the march to deregulation in banking was a fundamental principle of the New Deal reforms: providing simple and assured vehicles for ordinary people to save and borrow. The philosophy of deregulation supposedly trusts that all people are wise and make good decisions, but what it really believes is that those who are simple and make bad decisions get what they deserve. This philosophy has manifested itself well beyond banking, in proposals to privatize Social Security and in offering those bewildering "options" on Medicare drugs.
The Reagan belief that government can’t solve problems because government is the problem has had a long run, but the present financial crisis may at last be putting the lie to it. In the face of a near panic, the country may be coming round to see, as it did in the 1930’s, that government is the most effective agent to promote the common good. In terms of personal economics, people may once again demand a return to stability in commercial banking: not "safety nets," not bailouts, but a reliable and rewarding system for saving and for borrowing, so that ordinary risk-averse folk, and even their children, can succeed not on craftiness but on will-power alone.
The worldwide financial system today is like electricity — hardly anybody knows how it works, but everybody expects that when they flip the switch the light will come on. It’s that sense of confidence and reliability that the Democrats should make the keystone of the upcoming elections. There would be no more effective TV ads than photos of the Depression-era bank panic, clips from an FDR speech, and the single tag-line: "Vote Democratic."
"Get this!" my sister Jeannie told me. "I went into Home Savings the other day, and what were they giving away for opening a new account? Electric screwdrivers! Then I went into my B of A branch, and what did they have at the door? A big bowl of suckers!"
You wonder if the banks saw the irony. Jeannie sure did.