Busch: Blaming Banks Wrong Way To Go

With the economy in a recession and massive jobs cuts seemingly announced daily, the public and government officials are searching for answers. Unfortunately, they are also looking to assess blame for the mess. From greedy hedge fund managers to inept CEOs to banks unwilling to lend, these descriptions are the easy way to understand complex economic relationships and financial ties. This populist environment drives headlines and actions.

The best example of this is what is happening in the land of Lincoln and Obama's backyard. There is a standoff between workers at Republic Windows & Doors and its owners and bank over the plant's closing. The 240 union workers staging a sit-in at the plant on Goose Island in Chicago to protest the loss of what they said is vacation and severance pay they've earned and the lack of notice about the closing according to the Chicago Tribune.

"On Monday, workers were visited by a parade of politicians, including Gov. Rod Blagojevich and U.S. Sen. Dick Durbin (D-Ill.), who voiced their support for the workers while threatening Republic and Bank of America with lost business, legal action and federal inquiry. At City Hall, Chicago aldermen called for hearings on Republic, which had received about $10.4 million in city redevelopment funds as of the end of 2007, according to city documents."

With Jesse Jackson delivering food to the sit-in workers and President-elect Obama voicing support for the workers, the situation has morphed from a situation that a company may have violated the federal WARN Act (requires 60-day notice of a plant's closing) to an outpouring of blame towards the lender that pulled the credit from the company (BofA).

Again, the Chicago Tribune: "Bank of America cut its line of credit to Republic, which the company said forced the plant's closing last week. Blagojevich threatened that the state would suspend all business with the bank until the Republic matter was resolved. Aldermen and Cook County officials also proposed suspending business with the bank and withdrawing hundreds of millions of dollars."

If this doesn't chill the bones of every banker around the country, I don't know what will. Also on this theme, US Senator Dodd last Thursday questioned why banks that have received money from the TARP program are not lending. "We want to see more progress from our friends in the financial sector -- more progress in foreclosure mitigation, in affordable lending, and in curbing excessive compensation. And if that progress is not forthcoming, we are prepared to legislate."

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This is the path the United States is heading towards as the recession takes its toll and government reaches further and further into the private sector to stabilize the economy. Initially, the moves are welcomed as workers are looked after, jobs are created, and big business vilified. However, the government forcing banks to make loans to companies that can't make the payments perpetuates the weak credit problem and keeps the cycle going. This cycle deploys capital to non-productive uses and keeps it from flowing to solid companies that can create new jobs.

This is eerily similar to what happened in Japan in the 1990s when companies were kept on life support when they should've been shut down. The US has always been able to adjust faster the changing economic conditions due to the ability to hire and fire workers faster than other nations. It's Schumpeter's creative destruction at its best with job churn high, but job growth high as well. This will now be challenged as aggressive, short term action is taken without regard to the corrosive long term problems it creates.



Andrew Busch

Andrew B. Busch here