Clinton's "Community" Banking

By Llewellyn H. Rockwell, Jr.

During the campaign, Bill Clinton promised to "end welfare as we know it," which appealed to voters who knew that welfare hasn't done its job. It turns out, however, that Clinton wants to end welfare as we know it by substituting welfare as we don't know it. One example is his "community development banks."

Clinton advocated the establishment of these federally subsidized institutions in Putting People First. They will provide loans for "low-income entrepreneurs" and would-be homeowners in the inner cities. Mandate for Change, published by the Progressive Policy Institute, outlines exactly how federal funds will be utilized for "uncollateralized loans." And Senator Don Riegle (D-MI), chairman of the Senate banking committee, says it will be one of the top priorities in the new administration's first 100 days.

Nowadays, a poor person merely gets food stamps, rent subsidies, free medical care, and monthly checks in the mail. The best way to shape up the recipients would be to announce a full-scale cut off of all this in twenty four hours. Legitimate need would easily be met by private charity. And millions would be shocked into being responsible for their lives.

But somehow this obvious solution is not going to be tried anytime soon. Instead, the answer runs in the opposite direction. In addition to welfare as we know it, Clinton's community development banks will make it possible for some to own a home and business without having to meet traditional standards of credit worthiness. No job, no savings, no permanent address, no credit rating? No problem. The local community development bank has somebody else's cash waiting.

The theoretical basis of establishing such banks is the "shortage of credit" in the inner cities. That's a strange concept. A "shortage" of credit really means a shortage of savings to back good credit or a shortage of trust that the money loaned will be repaid. In either case, the shortage is justified by economic and behavioral conditions. It is not visited upon communities from on high. Banks want to make profits as much as the next business, and if there were more of a demand for their services than can now be met, we'd see new offices being opened up.

Market realities never stop politicians, however, and the new administration and congress want to spend one billion dollars on the program, administered by Treasury and HUD. Taxpayers pay, and politicians get praise and votes for empowering the poor, as well as campaign contributions from those whom they enrich through bank franchises. Management? As with S&Ls, any shortfalls due to bad loans, imprudence, or crookery will be made up by the taxpayers, not the executives.

Supporters of this credit scheme like to point to Chicago's 20-year-old South Shore Bank as an example of community development banking. And indeed, it has kept defaults at a minimum. But this bank gets much of its capital not from D.C., but from a local working-class population that keeps an eye on bank practices. For that reason, the bank has resisted lending in the poorer areas of Chicago.

It is a false assumption that people need easy money to improve their lot. Before the advent of loose credit and central banking, we had the fastest economic growth in history – for everyone – and individual loans were rare. There was no deposit insurance, so the banker had to be 100% sure he could get the depositors' money back. If he was wrong, he was in trouble.

That was the age of the gold standard. Bankers, like parents, used one word more than any other: no. The loans that were granted tended to be short- term. Most people had to work and save to make purchases, meaning thrift was a virtue and unnecessary debt a social stigma. Government was small, taxes were low, crime was almost non-existent, and there was no inflation. Far from losing their purchasing power, savings actually gained in value over time, even if kept in a mattress.

But the efforts of the Federal Reserve System led to easy money. In the 1980's, for example, cheap dollars fueled corporate booms, the real estate craziness, S&L wildcatting, and a historic run-up of stock prices. Bankrupt? Don't worry. There's nothing wrong with stiffing your creditors, whether you owe them for your second color tv, or a shopping mall you were developing.

As a result of credit profligacy and financial promiscuity, we are now told that everyone has a right to a loan. What's good for Wall Street and the middle class is good for the "credit-starved" inner cities. This is nonsense. Even now, credit-worthy people, no matter where they live, can get loans. Without evidence, racism is alleged to deny good people credit. Yet black-owned commercial banks turn down a far greater percentage of black applicants than their downtown brethren.

These days, politicians are constantly discovering new needs, new forms of economic victimology, new examples of human suffering, all of which need to be met by this or that government program. This is one of many examples. But the purpose of the entrepreneurial market economy is to discover unmet needs and address them within the confines of resource constraints. In short, if credit is due, credit will be given.

There is no "right" to a loan, just as there is no right to be trusted by others. Both can only be earned through good behavior. Even with the Fed, credit remains a scarce commodity, and although the transfer is largely invisible, every loan given to an undeserving borrower hurts a deserving one.

Clinton hasn't told us about that, or about how much his plan will cost. He hasn't mentioned the subsidies, the bailouts, the higher interest rates that come with risky loan portfolios, and the inflation that accompanies cheap- money schemes. Nor has he told us that his community development banks are welfare too. By even raising the suggestion, he has induced regular commercial banks to step up unwise lending to stave off the establishment of subsidized competitors.

Mandated credit is the equivalent of diversion of funds. And welfare by another means is still welfare. After decades of such experiments, it is time for government to recognize an old truth: long-term prosperity requires people who defer gratification, save, and conduct themselves so as to earn the trust of others. Washington, D.C., is not exactly the best teacher in such matters.