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Ralph Nader > In the Public Interest > ‘Modernization’ A Dangerous Scheme

In coming months, the nation will hear a lot about various plans being hatched by the Clinton Administration and Congress to “modernize” the financial community.

Underneath the benign sounding phrases about “modernization” are some dangerous schemes that would radically alter the nation’s economic system by allowing banking corporations and commercial firms to operate under common ownership.

This would mean, for example, that a huge automobile manufacturer like General Motors could combine it resources with a multi-national banking giant like Citicorp. Or Microsoft, the dominant force in new computer technology, could link up with a major banking corporation such as Bank of America.

Currently such marriages of the commercial world with banking are prohibited under the Bank Holding Company Act which limits bank acquisitions to activities “closely related to banking.”

But, the brave new world being laid out on the drawing boards of Capitol Hill and U. S. Treasury Department conjures up an economic system where large corporations and large banks would form wide-ranging conglomerates to control large sectors of the nation’s economy.

These conglomerates could dominate the 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 judgment on where credit is allocated. Preference would invariably go to the banks’ commercial affiliates and the suppliers and customers of these affiliates. In many cases, corporate relationships, not credit worthiness, would guide bank decisions.

Competitors, operating outside of these conglomerate structures, would find credit scarce and costly. New innovative enterprises that might develop products that compete with 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 would be dictated by conglomerates controlling major sectors of the economy.

Independent banks that try to compete with these conglomerates will likely find themselves shut out from any dealings with the affiliates or the customers and suppliers of these affiliates.

If local communities think they have trouble now getting the attention of banks about lending and development needs, just imagine the difficulty of reaching anyone that cares in the management of a conglomerate stretched coast-to-coast and preoccupied with the performance of its non-financial 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 conglomerates would literally be the local economy. No politician would walk away from 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 should 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 unrelated 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 conglomerate would be deemed too big to be allowed to fail. Second, the entire conglomerate — including the non-financial entities — would be bailed out for the fear the public would lose confidence in the insured bank it ifs affiliates collapse.

There is no compelling reason for a drastic change in the nation’s financial system. Banks are awash in profits that are piling up quarter after quarter. Both the Federal Reserve Board and the Office of the Comptroller of the Currency have recently expanded the role of banks in insurance and securities. Congress ought to see how these new activities work out before playing with the volatile mixture of banking and commerce.

The plans for tearing down the wall that separates banking corporations and commercial firms should be assigned to the government’s file cabinet for bad ideas.

[For more background on proposals to combine banking and commercial corporations see “The Separation of Banking and Commerce”, by Jonathan Brown, Essential Books, Box 19405, Washington D. C. 20036, Single copies $10.]