Our View - Thursday

REASONS OUR BANKS FAIL
Loose money, negligence, bad loans

The collapse of IndyMac Bank, one of the largest savings and loans in California and the seventh-largest mortgage originator in the United States, may well have been precipitated by the unwise publicizing of remarks by New York Democratic Sen. Charles Schumer, chairman of the Economic Policy Subcommittee of the powerful Senate Banking, Housing and Urban Affairs Committee. But IndyMac's more fundamental problems existed independently of Schumer's loose lips; they have to do with federal policy ostensibly designed to protect depositors, and they could lead to as many as 150 more banks failing in the next year or so.

On June 16, Schumer sent a letter to several federal agencies expressing concern that IndyMac "may have serious problems with its current loan holdings and could face failure if prescriptive measures are not taken seriously."

The good senator was not content simply sending the letter to interested regulators; like most politicians, he loves to be featured in news stories. There's an old joke floating around that the most dangerous place to be in Washington is between Schumer and a TV camera. That being the case, he released the letter publicly.

The letter led to a bank run - something that just isn't supposed to happen with federal deposit insurance - and within a couple of weeks depositors took out more than $1.3 billion. This led to a liquidity crisis at the bank, which came on top of capital problems that had already been mounting. IndyMac announced layoffs and the closing of several divisions, but it wasn't enough. On Friday the Federal Deposit Insurance Corp. placed IndyMac into conservatorship, establishing a bridge bank (IndyMac Federal Bank, FSB) to handle things until the company's assets can be sold. The FDIC announced that in accordance with long-term policies, accounts up to $100,000 will be safe.

Ironically, that taxpayer guarantee of accounts was almost surely a factor in the risky practices IndyMac engaged in. As we learned in the 1980s with savings and loans, and seem to be relearning now, when financial officers know depositors won't have to suffer losses, their incentive to stick with prudent practices declines. Depositors also have little incentive to look behind glittering promises to investigate how sound a bank's practices are.

The problem, which economists call moral hazard, is compounded by the fact that the FDIC charges a flat rate to banks and thrifts to pay for deposit insurance. If the FDIC were allowed to charge variable rates - as it surely would if it were a private insurance company rather than a government agency - it could charge more to banks whose practices made insurance a higher risk. The possibility of higher charges would serve as an incentive for banks not to get too "creative" and a signal to depositors that a bank might be somewhat shaky.

IndyMac did not specialize in the subprime mortgages that have received so much attention, but did a lot of business in "Alt-A" mortgages, which are described as just below qualifications for a prime mortgage, but better than for a subprime mortgage. But when the housing market began to collapse, it turned to brokered deposits - large, pooled groups of CDs that are expensive for a bank - to back up its loan portfolio.

The mortgage crisis has triggered calls for more regulation. But a number of the real causes - loose money from the Federal Reserve and a push from government for lenders to provide more mortgages to people who didn't qualify under ordinary standards - suggest that less government involvement rather than more would be a better prescription.

WE CAN'T DRIVE 55 - AGAIN

Is the United States reliving the 1970s? Interest rates certainly are well below the 19 percent high they reached late in that decade, but the housing industry is slumping, gas prices are soaring, the current president is wildly unpopular, inflation is heating up and many believe economic malaise is setting in. Even some quaint remnants from the 1970s are coming back, ranging from those colorful polyester fashions to - get this - calls to impose a nationwide 55 mph speed limit.

President Richard Nixon signed the speed-limit cap as part of a broader bill designed to reduce U.S. dependence on foreign oil, but President Jimmy Carter became a big advocate for the law.

Now, a prominent Republican, Sen. John Warner of Virginia, and a freshman Democrat, Rep. Jackie Speier of California, are proposing another national bill to cap speed limits at 55 in response to the latest oil crisis. Here we go again.

"There is no reason to wait for OPEC or the oil companies to help us out," Speier told the San Francisco Chronicle. "Every driver can effect change simply by easing up on their right foot."

Warner said that the 1970s-era speed limit saved 167,000 barrels of oil a day, and, given the higher number of vehicles on the road today, "one could assume that the amount of fuel that could be conserved is far greater." One could, if one were to ignore the fact that autos on the road today, even SUVs and pickup trucks, are much more fuel efficient than the behemoths that prowled the highways in those days.

Here, again, we see how every "crisis" leads for calls for more government power and fewer individual freedoms, and such calls typically come in a bipartisan fashion.

There are many things wrong with this idea. States, not the feds, should determine their own speed limits. As the National Motorists Association points out, "[S]peed limits work if they reflect the speeds normal responsible people typically drive. ... If most of the traffic on a given road travels between 50 and 55 mph, and the speed limit is set at 55 mph, almost all the traffic will be in compliance with the speed limit. If the speed limit is set at 45 mph, traffic speeds will remain at 50 mph to 55 mph." So, lowering the limit is unlikely to save much oil, as drivers will continue to drive at the natural limit.

More drivers will get tickets and have to pay fines to the state. Insurance rates will go up for many drivers. It will take people longer to get places, and costs will rise for trucking firms given that the time expense will undoubtedly exceed the meager fuel savings. As Sammy Hagar once belted out, "What used to take two hours now takes all day." To trucking companies, time is money.

We've already seen from past studies that road safety will not improve. It could even get more dangerous out there, as speed differentials will increase between the slow drivers and the fast ones, because it's unlikely the speedsters will slow their pace. Plus, let's face it, it's miserable to drive a powerful car at 55 mph on a long trip.

Here we get back to the Carter era. Remember when the president told Americans to turn down the thermostat and wear a cardigan to save energy? The country then, as now, needs to reduce energy regulation and increase oil production. Individuals are already practicing their own conservation - fewer driving vacations, more switches to fuel-efficient cars.

But for the energy Puritans, the goal is to make us miserable, as a punishment for our evil, gas-oriented, consumer lifestyle. They want us to wear sweaters and drive econoboxes, slowly.

Individual Americans are stuck again with a retro-style oil "crisis," but we need not embrace those timeworn attitudes.