June 1, 2006
Otis White is nostalgic for the days of "strong and engaged local bankers," men who worked their way up to become the "capi di tutti capi of civic leaders in most cities. ... They ran important companies, but that wasn't why they were powerful. Their power came from their continual involvement in civic work, an intimate knowledge of their communities and their occasional boldness." (New York Times, June 1.)
I immediately thought: "redlining." I don't know for sure, but I suspect that those "civic bankers" of old helped to keep African Americans and Latinos confined to poor neighborhoods by refusing home loans. If that's true, it should be part of the story.
Nevertheless, Otis is right that there was a positive side to the old banking industry--and all forms of commerce that are rooted in localities. As my colleague Stephen Elkin argues in a new book (Reconstructing the Commercial Republic: Constitutional Design after Madison), a free market always generates a politically powerful class. Perfect political equality is incompatible with the economic freedom that generates prosperity. However, it matters who holds disproportionate power because of their wealth. Madison counted on an agrarian elite, whose investments were tied up in land. Because they could not easily move their capital, they would have to worry about their communities and their reputations.
The same was true for banks in the 1950s-1980s. As Otis notes, "The law prohibited bank companies from owning banks outside their home states and sometimes even outside their home counties. So Citizens and Southern [National Bank] could grow only if Atlanta grew too." Thus you could count on bankers for civic leadership, especially in dire situations like natural disasters. But today, "the top three banks in Chicago, Dallas, Denver, Houston, Los Angeles, Washington and scores of other cities are owned by companies headquartered elsewhere. (In New Orleans, only one of the top three is owned locally.)"
Even the redlining example illustrates how incentives have changed. Discriminating against minority borrowers was completely immoral and indefensible. It was also economically irrational, but it supported a community norm (racial discrimination). Today's international corporations, with their mobile investments, cannot advance any value--moral or immoral--other than maximum returns for their shareholders. When a Hurricane devastates New Orleans, the banks' best response is to take their capital away, not to help rebuild the city.
June 1, 2006 7:38 PM | category: none
From David Airth, via email:
I read the NYT article with great interest. It is good to understand what makes a community flourish.
Peter, I liked what you pointed out, "that those "civic bankers" of old [probably] helped keep African Americans and Latinos confined to poor neighborhoods by refusing home loans". Perhaps that is one reason why the old network had to end. And, basically, that network had done its job of giving the fundamental civic footing places like Atlanta needed. Now, on to the next step of integration and globalization.
The article in the Times reminded me of another story they had a few years ago on insurance. Harlem was just entering a renaissance and much of that renaissance was attributed to insurance companies entering and insuring properties in Harlem, something they had avoided or refused doing for years. That kind of capitalization sure makes a difference to a community's vitality and survival.
That banks have not returned to New Orleans is due to a business reality. New Orleans is not yet that save a place to invest in. That is why a federal government is important and needed, and should be competent. The feds could guarantee the loans banks are reluctant to make, like a New Deal investment. But, no. they have not stepped up to the plate because they think as conservatives, totally in 'free market' principles.
June 2, 2006 10:12 PM | Comments (1) | posted by Peter Levine