Llewellyn H. Rockwell, Jr.
are at least three ways to expand the welfare state: tax and spend,
impose new mandates on business, and politicize the banking and
credit system. President Clinton is trying to do all three, although
we hear little about the third. Yet it is the most insidious sort
of welfare. It undermines the integrity of the banking and credit
system while being largely invisible to the voting public.
a free economy with a sound currency, credit is allocated by merit.
Say an acquaintance asks you for a $1,000 loan. If you are in principle
willing to make the loan, you will take into account his job, his
assets, and his character whether he pays his bills. You can then
predict with some assurance whether he will repay your loan, and
therefore whether you should make it.
free-market banking system takes largely the same approach. When
a person applies for a loan, the financial institution checks job
history, assets, and loan history, summarized in a person's credit
rating. Though reviled by deadbeats, the credit rating is a magnificent
creation of the free market.
Clinton has a different view. Forget justice or economic efficiency.
He wants banks to make welfare loans that ignore the market-driven
standards. That is, he is using the powers of the federal government
to force banks to make loans to people who shouldn't be getting
excuse is only too familiar. Clinton says that racial minorities
are being unfairly discriminated against in mortgage and business
loans. The answer? Dispatch hirelings from the Office of the Comptroller
of the Currency, the agency which oversees federally chartered banks,
and the Department of Housing and Urban Development, to pose as
government "testers," as Clinton calls them, will be members of
minority groups. If they don't get a loan, the government will cry
foul and slap big fines on the banks. And given the reward system
in Washington, D.C., the testers will have strong incentives to
act so as to be denied a loan.
"testers" should actually be called intimidators or even terminators.
No bank will know whether a minority applicant is real or a federal
phony. So whether the person passes the usual qualifications tests
or not, the bank will tend to make the loan.
a man comes in with a stocking mask, a gun, and a note for the teller,
the bank calls the cops. But under the Clinton plan, the mask covers
the Controller, the Congress writes the note, the executive branch
holds the gun, and the Federal Reserve (the lender of last resort)
provides the getaway car.
bank that has denied credit to as few as five minority applicants
will be targeted. And small banks will be disproportionally affected,
for they can afford to take fewer risks than the big banks.
is good news," said Democratic Rep. Joseph Kennedy from the big-bank
state of Massachusetts. The "testers program will go a long way
to remedying the discrimination that study after study has shown
exists in the banking industry."
after study? Every year the Federal Reserve System publishes a study
on discrimination in lending. But its figures are not adjusted for
credit rating, job history, income, or other relevant factors. The
Fed always finds that blacks do indeed get fewer loans than whites,
while Hipanics are in the middle. But Asians always get more loans
than whites. Either bankers are yellow supremacists or Asians are
simply better credit risks.
special study by the Boston Fed did adjust credit rating, and that
pulled the black-white loan ratio within seven percentage points.
But the author of the study, Alicia Munnell, admitted to Peter Brimelow
of Forbes magazine that her study didn't take into account
enough variables to prove lending discrimination, despite her statements
to the press. Munnell, who also wants to tax the present value of
all pension plans, is Clinton's assistant secretary of the Treasury.
studies to which Kennedy might be referring come from the far-left
Association of Community Organizations for Reform Now, or ACORN.
They too failed to adjust their data for income, job history, or
credit rating. Yet they stupidly insist that blacks are not getting
their fair share of loans. The remedy? A system of mortgage quotas,
which Clinton seeks to impose by default rather than design.
dozens of programs already in place to give minorities preference
in lending especially the Community Reinvestment Act are tying
banks in regulatory knots. This new form of welfare will further
destabilize the banking system, something we ought to worry about
in the aftermath of the S&Ls.
H.L. Mencken said, the world is divided into those who pay their
bills, and those who don't. A free-market banking system, which
properly discriminates between these groups, rewards responsible
behavior and punishes the form of theft practiced by the deadbeat.
the banking system fell under the control of government, as it did
with the Federal Reserve Act of 1913, it became a tool for government
planners to use to further their ends. Thanks to the Federal Reserve,
and the destruction of the gold standard, the government has funded
half a dozen wars, expanded itself in the process, elected its favored
candidates to office, manufactured phony booms and all-too-real
depressions, and has now become the welfare provider of last resort.
to do? Ironically, the answer was provided by Alan Greenspan in
1966. "An almost hysterical antagonism toward the gold standard
is one issue which unites statists of all persuasions," he wrote
before becoming rich, famous, and powerful. Statists know that "gold
and economic freedom are inseparable."
virtue of gold, wrote Greenspan, was that it "is incompatible with
chronic deficit spending (the hallmark of the welfare state)." "Under
a gold standard, the amount of credit that an economy can support
is determined by the economy's tangible assets, since every credit
instrument is ultimately a claim on some tangible asset." Abandoning
the gold standard "made it possible for the welfare statist to use
the banking system as a means to an unlimited expansion of credit."
return to a rigorous gold standard would have the same effect on
big government egalitarians as a father taking the car keys away
from his tipsy son: it would no longer be a threat.