LEACH IS RIGHT

House Banking Committee Chairman Jim Leach’s performance on banking legislation in the recently departed 104th Congress drew a lot of negative reviews from both the financial community and the consumer movement — albeit for different reasons.

But, Leach may be up to some new tactics in the 105th Congress. Even before the new Congress organized, Leach was sounding Paul Revere warnings about schemes to break down the long-standing barriers that separate banking and commerce.

In a speech to an investors conference in early December, he warned that common ownership of banks and commercial enterprises “could precipitate dangerously imprudent changes in the economy.” Leach has followed up with a letter to Secretary of the Treasury Robert Rubin, urging that the Clinton Administration cease and desist on plans to mix banking and commerce.

These utterances of firm opposition to the plan are a welcome change from the on-again, off-again efforts to please every industry whim that plagued Leach’s chairmanship throughout the last Congress.

His position on the mixing of banking and commerce puts him at odds, not only with the Clinton Treasury Department, but with his Senate counterpart, Alfonse D’Amato, who has long promoted the idea of letting banks and corporations link hands and power.

If the Clinton Administration and Senator D’Amato combine forces, it will create a legislative steamroller that may be hard to stop. Before the 105th Congress runs its course, the economic system could be significantly altered.

The dangers are real.

At a minimum, common ownership of banks and commercial firms will create powerful conglomerates that would dominate the nation’s economy, reduce competition, limit consumer choices, misallocate credit and place enormous strains on the deposit insurance funds.

As members of these giant conglomerates, banks would be unable to make independent judgments on where credit is allocated. Preference would invariably go to the banks’ commercial affiliates and the suppliers and customers of these affiliates. There would be a natural inclination for many bank decisions to be more heavily influenced by corporate relationships than credit worthiness.

Competitors, operating outside of these conglomerate structures, would find credit more scarce and costly. New innovative enterprises which might develop products that compete with the conglomerates’ affiliates would likely find their efforts crushed.

The inevitable distortion of credit allocation would have a substantial negative impact on competition and the productivity of the entire economy. Prices and choices often will be dictated by conglomerates that control sectors of the economy. A combination of Microsoft and Citicorp, for example.

If activists think they have trouble now getting the attention of banks about community lending needs, just imagine the difficulty of reaching anyone who cares in the management of a conglomerate stretched coast-to-coast and preoccupied with the performance of its non-bank affiliates.

It is no secret that economic power and political power have always walked hand-in-hand. Conglomerates, combining the resources of major corporations and major banks, would be difficult for politicians and officeholders to ignore. In many communities, enterprises controlled through these conglomerates would literally be the local economy. No politician would ignore the demands of these power centers — campaign finance reform notwithstanding.

Even for those who might be comfortable with these new corporations controlling the basic decisions in the economy, there has to be concern about how far the federal safety net will be stretched when the assets of insured banks are combined with assets of uninsured and unregulated non-bank corporations.

The hundreds of billions of tax dollars used to bail out the savings and loan industry would look small, indeed, against the costs of propping up Fortune 500 companies along with mega banking corporations. The arguments that would be advanced by the regulators are boiler plate: First, the conglomerates are too big to be allowed to fail. Second, the entire conglomerate — including non-bank entities — must be bailed out for the fear the public will lose confidence in the insured bank if its affiliates collapse.

Mixing of commerce and banking is dangerous. The Clinton Administration should quietly store the plan in the government’s file cabinet for bad ideas.

Jim Leach is right on this one.

Where do the other Members of Congress stand on the issue? Constituents ought to start asking now — before the financial lobbyists start a rush to judgment — a judgment for and by the big banks and the big corporations.