CENTRAL VIEW for Monday, March 2, 2009

Banking nationalization: The trend accelerates

The Obama Administration is now in the process of nationalizing some of America’s larger banking institutions. Actually, this is nothing new. Bank nationalization began in the Carter Administration. Bank nationalization picked up steam during the Clinton Administration. Unfortunately, Bush 43 continued on down that slippery slope.

But first, let’s consider Banking 101. Prior to Carter’s Community Redevelopment Act, home mortgage loan decisions were based on three pillars: Character, Collateral Capacity.

Character meant that loan officers would check into the backgrounds of loan applicants. Character checks included looking to see if loan applicants had been paying their bills on time and even looking for a pattern of criminal or anti-social behavior. Collateral meant that the applicant needed to pledge some kind of tangible assets that the lender could acquire should the borrower default on the loan. Capacity had to do with the prospective borrower’s ability to generate the cash needed to at least pay the interest on the loan.

Home ownership tends to create a stable and tranquil domestic society. When people have a stake in real property, they tend to be law-abiding and supportive of the government that keeps them safe in their persons and their property. But what if some people do not have a real stake in their home? What if they were able to move into their home for no money down? What if lenders had been forced by government regulators to loan out money for homes to borrowers who could not even pay their phone bills?

When the federal government does that, one can make the case that taking away the discretion of the banks as to whom they must lend and under what conditions is, in effect, the nationalization of the banking industry.

As we should have learned from this current financial fiasco, our entire money and banking system relies on that husband or that wife or that widow or that single-parent going to the mailbox each month and sending in his or her monthly mortgage payment. When that does not happen each month, our entire financial system begins to collapse.

The other factor at work is the old truism: Nothing happens until a sale is made. In addition to borrowers making their mortgage payments, our system also depends on willing sellers and willing buyers engaging in trade. If no one has any money to buy anything, then nothing happens. The economy comes to a screeching halt.

Pity the poor person who must sell something in order to put groceries on the table. When many people only have money for food and shelter, then sellers are not likely to find many buyers.

With no income, those who have savings must take their savings out of banking institutions to pay for their daily needs. As they take their money out of banks, the banks have less money to loan. If the banks have no money to loan, then merchants cannot borrow money so they can stock inventory. It becomes a vicious cycle. So, if government intervention in the home mortgage lending markets caused the current economic chaos, is more government intervention going to restore order?

The Obamians believe in Keynesian economic theory: Lots of government spending will stimulate the economy. That might be true in the short run; however, the money the government borrows to stimulate spending must be paid back. When the federal government cannot find enough investors to lend it money; the federal government simply prints more money. All of this leads to the hyper-inflation that is so cruel to people on fixed incomes.

The answer? Allow home mortgage lenders to base their lending decisions on: Character, Collateral and Capacity. That’s the way back to the days when home ownership did, indeed, make for a growing economy and for domestic peace and stability.

William Hamilton is a syndicated columnist and featured commentator for USA Today. Dr. Hamilton studied at Harvard’s JFK School of Government and was an assistant professor of history and political science at Nebraska Wesleyan University.

©2009. William Hamilton.

Dr. Hamilton can be contacted at:

Email: william@central-view.com