The Fed has an opening on its board of governors, and apparently a
social worker will fill it. Her name is Carol J. Parry of Chase
Manhattan Bank, former director of child-welfare services for New York
What could this mean? The Fed, an institution wholly unnecessary in a
free society, was founded in the name of scientific money management. It
promised to smooth out business cycles and curb inflation. Of course,
it’s given us plenty of both.
With money increasingly flowing out of the banking system, and
international markets making the central bankers look powerless in
comparison, the Fed needs a new rationale. What better than to reinvent
itself as another Washington-based agent of social reconstruction?
Hence, its charter will effectively be amended by the addition of the
usual liberal whining about inequality and the plight of that political
class called the Poor.
In recent years, thanks to the so-called Community Reinvestment Act,
the banking system has already come to be used in this way. The CRA is
the key statutory justification for using the banks as a hidden adjunct
to the welfare state, handing out money to approved victim groups
through coercive regulatory ploys that bypass traditional lending
standards but don’t require
tax collection or fiscal outlays.
The idea is that banks shouldn’t discriminate in their lending
standards between successful and unsuccessful areas, particularly if
those areas are characterized by some degree of racial homogeneity.
Regulators backed by liberal pressure groups enforce the act, which
means that banks can be made, through publicity and threats of endless
legal harassment, to dump loans on
those less likely to repay them. It’s an extortion scheme that
redistributes money in a way that is very difficult to detect.
The CRA comes especially into play when banks seek Fed approval for a
merger or acquisition. During these times, regulators hold the future of
empires in their hands, and they lecture bank officers on their Social
Obligations — i.e., their duty to pay off pressure groups. To get the
regulators and marauding social activists off their backs, banks promise
billions in loans to (code-word alert) “low-income borrowers.”
Non-performing loans are later repackaged and sold to federally
subsidized financial institutions.
The costs to the bankers themselves can be exorbitant. Some smaller
family-managed banks have had to shut their doors when faced with an
unbearable imposition of quota loans. Only the largest can survive this
level of harassment, which is why the big guys in the industry are not
screaming too loudly. CRA is pro-poor, but among the indirect
beneficiaries are the largest banks in the country.
There’s also a cost to worthy loan candidates and depositors. The
loans given to “underprivileged borrowers” (read: privileged borrowers)
do not magically appear; they are drawn from the pool of resources which
would otherwise be available to qualified borrowers. Since loans given
by CRA criteria are necessarily risky (but it would be “discrimination”
for the interest rate to reflect that fact), depositors’ money is less
secure than it otherwise would be. This is unsound banking imposed by
But what about the claims that banks discriminate? Sheer nonsense.
None of the liberal studies consider, for example, the individual loan
risk that the banker must consider when granting or declining an
When you look at average risk, as measured by credit rating and
assets, it turns out that blacks are the riskiest borrowers and Asians
the least risky, so it is hardly surprising that loan patterns in a free
market tend to fall along the same lines.
Bankers are in the business of making a profit. It doesn’t matter to
loan officers where you live or what race you are, so long as you are
extremely likely to pay the loan back on schedule. Of course banks make
mistakes, but the whole idea of a competitive system is that one bank’s
errors are another bank’s profit opportunities. What the CRA does is
thwart market lending standards so that the loan business is driven by
welfare ethics instead of market ethics.
Returning now to Ms. Parry. It turns out that she is an expert on the
CRA, and an advocate of using the law in a thoroughly egalitarian
fashion. She is said to be a moderate within the overall scheme of
things, but this isn’t saying much when you consider the socialistic
demands of the
“fairness-in-lending” bunch. Of course she’s someone that the biggest
players in the banking industry can work with, else her name would have
never come up in the hunt for another Fed board member, nor would she
have a plush corner office at David Rockefeller’s bank.
More interesting is how the White House insured that the next slot
would be filled by a social worker. According to the Wall Street
Journal, the National Economic Council told the Fed that “someone with
community-development experience would be well-received.” The Fed
agreed, as always, providing yet more proof that the central bank is not
independent, as its press releases always say, but as much an agent of
the presidential apparatus as HUD.
It is always a grave error to allow central bankers — inevitably in
league with the State — to control the lifeblood of the economy, the
money. Once we abandoned the 19th-century model of banks as independent
competitive units, monetary policy necessarily reflected the political
priorities of the White House. In the age of Clinton, that means
welfarizing the banks.