The Daily Bell Issue 393 • Friday, August 28, 2009 | |
1,000 banks to fail in next two years
Chip Somodevilla/Getty Images
The US banking system will lose some 1,000 institutions over the next two years, said John Kanas, whose private equity firm bought BankUnited of Florida in May. "We've already lost 81 this year," he told CNBC. "The numbers are climbing every day. Many of these institutions nobody's ever heard of. They're smaller companies." Failed banks tend to be smaller and private, which exacerbates the problem for small business borrowers, said Kanas, who became CEO of BankUnited when his firm bought the bank and is the former chairman and CEO of North Fork bank. "Government money has propped up the very large institutions as a result of the stimulus package," he said. "There's really very little lifeline available for the small institutions that are suffering." - CNBC
Dominant Social Theme: Pity?
Free-Market Analysis: Yes, a pity. America once had a banking system unlike any other, the closest thing to a national free-banking network that the world has known in the past few hundred years. But all that is changing, whether US Tresury Secretay Timothy Geithner (pictured above left) believes it or not, and has been since at least the Civil War. The Civil War is the demarcation line between libertarian America and a nascent European America.
It is no coincidence that the modern stock market, modern money (Greenbacks) modern speculation and modern banking all got their start during and after the Civil War. And let's add modern (European) governmental corruption as well. The Tea Pot Dome scandal, Tammany Hall and too many other scandals, too numerous to mention, took root in the post-Civil War era.
Prior to the Civil War, the American way of life was more rural than not and government and bank-induced centralization had not yet taken place. It was difficult to entirely traduce freedom because people would just move from one state to another. And if the state's populace didn't like the way things were going, it could give the union the heave ho. That was an implicit part of the Constitutional compact. You could leave the union. All that changed after the Civil War. The states became bound to an "ever-more perfect union" and the Federal government itself became the enforcer increasingly of group "fairness" (versus individual rights).
What does this have to do with banking? America never really had free-market banking but it had something close to it. The problem came when banks were chartered. Municipalities usually insisted that banks purchase major amounts of municipal paper in order to do business in the area. And often the municipal paper turned worthless or nearly so, precipitating a run on the bank. Thus it was that "wildcat banking" began to get a bad name, historically. But free-banking, real free-banking, fractional-reserve or not, is certainly preferable to what is present today.
Today, America suffers from the European banking syndrome. The banking system is in a permanent state of contraction. The rudiments of free-banking remain, like a skeleton crumbling to dust, but in reality the banking network functions to some degree as an appendage of the US Federal Reserve. It is reluctant to lend, concerned mostly about self-preservation and increasingly risk averse.
The more homogenized the system becomes, the more useless it becomes as well. The remnants of the American system can be found in "relationship banking" practiced by small banks throughout America, a signature of the entrepreneurialism that still exists in the United States. But as these small banks are shattered and bankrupted by one crisis after another, the big banks move in. In place of the independent stands a branch office. The relationships are severed and the decisions are made a thousand miles away.
The nation as a whole remains over-banked, of course. Banking is a kind of omnipresent industry in both America and Europe, the one indispensible element, the bubble that keeps on giving, for central banks will never deflate their banking networks. They will consolidate them, however. America had 16,000 banks perhaps 20 years ago. Today it has 8,000 banks. Eventually America will have 1,000 banks, or perhaps 100. The system will look the same of course, because branches will take the place of independent entities. But the consolidation and homogenization will proceed.
Conclusion: It is sad to see the consolidation of banking in America. But it is not anything recent. The harrowing has been in place for 150 years now and there is very little left of the monetary system that made America the most powerful and prosperous country in the world. American citizens (at least until recently) tended to believe that the modern elements of their society were responsible for their prosperity. Nothing could be further from the truth. It was the system, like the business end of a rocket ship, created some 300 years ago that powered the blast-off the US superpower. As can be seen by the inevitable and endless banking consolidation, the greatness that was America diminishes as its founding institutions wither.
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