Pleasanton Weekly

Opinion - March 6, 2009

Guest Opinion

The bank as a utility company

by Gary Alt

The local impact from the breakdown of the financial system is painfully obvious. Our outstanding schools are facing a 9 percent budget cut next year. Domus and the Pleasanton Hotel were longtime downtown anchors, and have recently vanished. Big companies in the Tri-Valley are laying off people or closing, such as Washington Mutual, Dublin Ford, EXPO Design Center and many others. Our idyllic community is bearing the brunt of a failed banking system that needs fixing.

The recent fallout highlights two distinct banking types: I call them utility banks and investment banks. Utility banks are a reliable and predictable source of money for consumers and businesses that drive economic growth. These banks provide consumer loans, business loans, construction loans, checking and savings accounts. Investment banks are a source of money for complex and higher risk needs such as mergers and acquisitions, hedge funds and other speculative ventures.

Utility banks need to be safe and predictable, and we should be able to rely on them as we do our public utilities. Just as electricity and water are essential services for the health and welfare of our community, a reliable source of money is crucial for a stable economy. A stable banking system benefits more than businesses and schools: nonprofits such as Shepherd's Gate, Tri-Valley Haven, Rotary and the Museum on Main Street all rely heavily on financial donations from individuals. The reach of these nonprofits throughout our community is profound.

By allowing utility banks to also act as investment banks, congressional leaders from both parties failed to protect the underpinnings of our economy. We learned this lesson during the Great Depression, fixed the problem, and then decades later we removed this safeguard. After bank failures fueled the depression, the Glass-Steagall Act of 1933 outlawed commercial banks from engaging in investment banking. One benefit was that customer deposits weren't at risk of loss due to bad ventures of the investment banks, thereby increasing consumer confidence. In 1999, Glass-Steagall was repealed by the Gramm-Leach-Bliley Act. Since then we've seen an expansion craze by large banks. To continually boost profits, Citibank expanded into hedge funds, brokerage services, insurance, investment banking, credit cards, and loan underwriting standards were lost.

Had we separated utility banks from investment banks, and maintained quality banking standards, we wouldn't be facing these problems. It's time to structure commercial banks so they can be as reliable as electricity and water, to help fuel a healthy, growing economy. We also need to regulate investment banks so their risky ventures don't threaten the foundation of the entire global economy, let alone ours in the Tri-Valley.

Taxpayers are in a bind--we understand the need for a strong local economy, job market and housing market. I think most people understand the need for government to help stabilize the utility aspect of banking to protect deposits and to lend money to consumers and businesses. But we resent that Wall Street investment banks were not regulated or managed properly and we in Pleasanton are footing the bill and losing jobs because of that.

Everyone benefits from a utility banking system. Stable employment and housing are central to that. Just as important, our children who attend Pleasanton schools and those families receiving assistance from Tri-Valley nonprofits benefit too.

Gary E.D. Alt is the co-founder of and managing partner with Willow Ridge Capital Advisors, a wealth advisory firm based in Pleasanton. He and his family have lived in Pleasanton since 1999.

Comments

Posted by Stacey, a resident of Amberwood/Wood Meadows
on Mar 6, 2009 at 2:12 pm

Excellent points. The restoration of consumer confidence will most likely not occur until the rules of the game are revised and restored. No one wants to play games with cheaters.

FDR's first inaugural address sounds as familiar today as it was when first written: Web Link

"... we face our common difficulties. They concern, thank God, only material things. Values have shrunken to fantastic levels; taxes have risen; our ability to pay has fallen; government of all kinds is faced by serious curtailment of income; the means of exchange are frozen in the currents of trade; the withered leaves of industrial enterprise lie on every side; farmers find no markets for their produce; the savings of many years in thousands of families are gone.

More important, a host of unemployed citizens face the grim problem of existence, and an equally great number toil with little return.

...

Primarily this is because the rulers of the exchange of mankind's goods have failed, through their own stubbornness and their own incompetence, have admitted their failure, and abdicated.

...

True they have tried, but their efforts have been cast in the pattern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tearfully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.

...

there must be an end to a conduct in banking and in business which too often has given to a sacred trust the likeness of callous and selfish wrongdoing. Small wonder that confidence languishes, for it thrives only on honesty, on honor, on the sacredness of obligations, on faithful protection, on unselfish performance; without them it cannot live."

I paste the above not to imply that I fully condone FDR's programs, only to point out how similar the public situation and sentiment was back then to how they are today.


Posted by Vince, a resident of Castlewood
on Mar 6, 2009 at 11:15 pm

New to this forum for ~ month. Is Stacey a full time writer for this forum? Not trying all to be offensive but I see her name on here all the time on all the posts. I just can't imagine having that much time to comment on so man topics without being assigned to the forum as a paid employee.


Posted by Stacey, a resident of Amberwood/Wood Meadows
on Mar 7, 2009 at 9:00 am

Vince,
I'm not a paid employee. I don't respond to all the posts, but I do read a lot. I'm not here all the time. I think that's an illusion because I write so much. Honestly, I have an equally hard time imagining how other people have so much time to use a Blackberry or other texting or email device.


Posted by Stacey, a resident of Amberwood/Wood Meadows
on Mar 7, 2009 at 9:20 am

When bringing up the banking system, I think the guest opinion only gives a part of the picture. We have to remember that the US operates a fractional-reserve banking system and with such, certain deregulation is dangerous. It isn't just the Gramm-Leach-Bliley Act, it's that acts effect combined with fractional-reserve.

Web Link
"The Financial Services Modernization Act of 1999 would make perfect sense in a world regulated by a gold standard, 100% reserve banking, and no FDIC deposit insurance; but in the world as it is, this "deregulation" amounts to corporate welfare for financial institutions and a moral hazard that will make taxpayers pay dearly."

I guess I could be called conservative. By conservative I mean "sticking to the old ways". I think there's no need to make a change to a system that's been working well for decades so I question why the removal of certain protections took place in 1999 and earlier.

Web Link
"Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors. Yup, it's Canada....Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers."


If you were a member and logged in you could track comments from this story.

Post a comment

Posting an item on Town Square is simple and requires no registration. Just complete this form and hit "submit" and your topic will appear online. Please be respectful and truthful in your postings so Town Square will continue to be a thoughtful gathering place for sharing community information and opinion. All postings are subject to our TERMS OF USE, and may be deleted if deemed inappropriate by our staff.

We prefer that you use your real name, but you may use any "member" name you wish.

Name: *

Select your neighborhood or school community: *

Comment: *

Verification code: *
Enter the verification code exactly as shown, using capital and lowercase letters, in the multi-colored box.

*Required Fields