Canada’s banks

By Joel Thurtell

Feb. 24, 2009

Ain’t it neat?

Al and  Paul agree.

Al is Alan Greenspan, former chairman of the Federal Reserve Board who got it all wrong on the housing bubble and the sub-prime bank disaster.

Paul is Paul Krugman, Nobel Prize-winning Princeton economist and New York Times columnist who called it right on the bubble and the sub-prime scam.

Now the Ayn Rand-worshipping Greenspan and the left-liberal Times columnist both say it’s time to nationalize the nation’s banks.

Some of them.

For awhile.

Nuts.

It would be easier, more intelligent and more efficient to simply abolish the Federal Reserve System.

Not that I’m against the federal government taking over and managing Zombies like Citibank and Bank of America.

But I know that the government could never find the cojones to do what really needs to be done: Take over the ENTIRE BANKING SYSTEM, boot the managers and shareholders and in one fell swoop create a system of national banks with local branches similar to what has existed for generations across the Detroit River in Canada.

What we have in this country is not just a problem with some huge banks that got in over their heads lending money to people who couldn’t afford to pay it back.

We have a system that allows too many banks.

We have a system that lets incompetent bank managers muddle on for years without discovery or corrective action from the so-called “dual system” of federal and state regulatory agencies supposedly entrusted with detecting and correcting insolvency.

Good luck.

I’m writing a book to be called “How to Stop a Bank Run,” based on my joelontheroad.com blog post of October 2, 2008 which brought so much traffic that it swamped my site. In trying to explain for myself what happened when a small town banker rebelled against Roosevelt’s 1933 Banking Holiday, keeping her bank open, I am learning things about the banking industry that I never understood.

Actually, I still don’t understand much of it, but after a retired Michigan bank regulator confessed to me that he too doesn’t understand fractional reserve banking — the basis for the Federal Reserve System — I don’t feel so bad.

In fact, I feel empowered to opine. My discoveries about Depression and pre-Depression era banking are relevant to what’s going on with banks today, it turns out.

For instance, even now, with banks on the ropes, new banks are being formed.

I was astounded [in early 2009] while doing research in the Lansing office that oversees banks in Michigan to hear staffers bragging that they’d just weeks earlier chartered Michigan’s newest bank, in Ann Arbor. Take a drive around Ann Arbor. Lots of banks. Did Ann Arbor need another bank? Or did some lucre-crazed folk decide to toss the dice to see if more money — fees and interest and who, knows, dicey home loans and credit cards — could be milked out of the citizens of Ann Arbor? The day has long passed when people needed a bank as a place to keep their money safe. Who needs a new bank?

We have way too many banks. Our history as a nation is one of too many banks, most of them turning Zombie at one time or another with little or no oversight from government. When bad things happen in crises oddly termed “panics,” government typically helps the banks and screws depositors by restricting or suspending withdrawals to give the yokel bankers a breather, then letting the good-for-nothing cashiers come back and run their banks straight into the ground — again.

I’m not kidding. When I first noticed it, I thought I was misinterpreting the old state banking reports I’ve been studying. But no, it is a fact that when Michigan banks started failing in droves after 1930, the normal procedure was to appoint a conservator to examine the books and salvage what could be saved of the bank’s bad investments, paying depositors and other creditors over a period of years and often a fraction of what they were owed.

Who were these “consevators”? Why, they were, invariably, whoever was the bank’s cashier at the time state bank examiners found it to be insolvent. Now here is an intriguing fact: Every year, according to the reports of the state banking commissioner to the governor, each bank in the state had its books examined by state regulators. It took a national banking respite followed by more minute checking of books to discover that many, many banks were operating with minuscule reserves. But citizens demanding their money were doing what bank examiners failed to accomplish — forcing banks to face the reality that the deposits they owed people far outweighed their ability to raise cash to repay those liabilities.

Sometimes during the Depression, the banks were outright closed. Other times, they emerged from what amounted to bankruptcy to be managed by the very same officers, directors and cashier who’d earlier run the bank into the ground.

The shareholders won. The losers were the depositors who trusted their “friends,” their local bankers.

This was not happening on a small scale, either. In Michigan between January 1, 1930 and February 11, 1933, we had 163 banks fail.

I’ve seen a calculation of some 9,000 banks that went belly up nationwide during the Great Depression. Few are aware, though, that throughout the Roaring Twenties, on average 600 banks a year failed in this country, Elmus Wicker in The Banking Panics of the Great Depression, Cambridge University Press, New York, 1996.

Six hundred banks! Moribund. Dead in the water.

Who created them?

Who thought such a pox was necessary?

What I am learning as I research this book is that historically, the United States has been overbanked. Where there might have been an adequate market in a small town for one bank, instead two, three or more were established. On one day in the Great Depression, three Ann Arbor banks failed. Farmington had two banks fail. In my home town, Lowell, bank examiners found that both banks were insolvent.

Mostly, these banks were started and managed by people with little or no formal education who had no fundamental understanding of how to keep a bank liquid enough to withstand the “panics” that induced people to descend on their banks in masses demanding the deposits they had every right to withdraw when or if they chose.

Bank runs, I’m discovering, were learned behavior in the U.S. They were the natural, even rational, reaction to irresponsible bank management often protected by governments all too willing to restrict or suspend bank operations to prevent citizens from getting their hands on their own funds.

Now here’s a thought: During the Great Depression and in the decade before, when the U.S. was losing thousands of banks, how many banks failed in Canada?

Zero.

I’ll write more about this in future, but let me leave you with this curious thought: In the Great Depression, what did Canada, Great Britain, Sweden, Denmark, The Netherlands, Spain, Portugal, Greece and Czechoslovakia have in common?

No bank runs, no bank failures.

Not one.

Was central bank activity involved, such as our Fed’s printing of scads of dollar bills to induce spending-equals-inflation or tinkering with interest rates to hopefully influence inflation or deflation?

Nope.

Interestingly, none of those countries was on the gold standard.

But the big common factor was this: A system of well-regulated national banks with local branches. No mom-and-pop startups mismanaged by storekeepers, farmers, plumbers and general goof-offs with a hankering to get their hands on their neighbors’ money.

What I say about the startups applies to the biggies, too. Because while it was mainly small banks failing in the 1920s, when the time came for lightning to strike during the Great Depression, the national Banking Crisis of 1933 was ignited in Detroit by a moribund bank controlled by Henry and Edsel Ford. 

One might argue justly that Henry Ford in many ways was a hick, but penny ante he was not. More on this later, too.

The problem with doing entirely away with our dual state-and-federal banking system is that there are some bankers out there with common sense and feelings of responsibility who did not take part in the greed-spawned sub-prime scramble, and they don’t deserve to lose their banks just because the biggies screwed up.

Yet the fact remains that even in these tough times, the Canadian banking system is sound, with zero failures being recorded. It makes me wonder what it would take to re-organize U.S. banks along the Canadian model.

If the Chinese premier is correct in accusing the U.S. financial system of plunging the entire world into a Depression with its sub-prime banker mania, a re-organization into a national system could prevent the next disaster.

Had a national system been in place before now, the current world economic crisis might be a figment of some lunatic’s paranoid fantasy.

Drop me a line at joelthurtell(at)gmail.com

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