As the U.S. faces the dirty job of reforming the financial industry, the hot-button question is this: do we want public policy to favor the garnering of huge capital by a few people and institutions, or to favor financial security for as many people as possible, meaning working people and others with small personal economies? The latter choice would mandate a strong dollar, sound, fair lending practices, incentives to save, and secure places to put savings.
In the current crisis, one bright spot has been that many state-chartered local banks have sidestepped the subprime lending disaster because they never got into that game. Here, banks like Florence Savings, Northampton Coop and Easthampton Savings, warned away from subprime lending by state regulators, have gone cheerfully about their business for years, picking up new deposits as larger banks closed. And relatively few homes have been foreclosed on by local banks that don't sell off their mortgages.
Yet a reform plan proposed by Secretary of the Treasury Henry Paulson threatens these smaller banks. Rather than preventing the rise of entities that are, in the words of Camden Fine of Independent Community Bankers of America, "too big to regulate and too big to fail" (which, given the spirit of our anti-trust laws and merger regulations, ought not to exist within our system anyway), Paulson's plan would create large, consolidated government bodies to regulate the very large institutions. It would require all banks to be federally chartered in order to get Federal Deposit Insurance Corporation protection, a measure that might spell an end to state-supervised banks.
So what's wrong with that? First, the fact that state oversight guided banks away from the fast-lane collisions in the lending business is an example of the usefulness of the decentralized system. Second, state banking officials often know the role of a given bank in its community better than the feds. Third, state banking commissions, while not apolitical, are under somewhat less pressure from large-scale moneyed interests than federal agencies.
