Llewellyn H. Rockwell, Jr.
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."
advocated the establishment of these federally subsidized institutions
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.
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
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.
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.
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.
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.
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.
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.
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.
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
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
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.
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.
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.